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Robert Rapier

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Is The Threat Of High Oil Prices Overstated?

As U.S. sanctions on Iran have forced some countries to stop importing oil from Iran, crude oil prices have inevitably risen. The U.S. started down this path earlier this year when President Trump announced the withdrawal from the Obama-era Iran nuclear agreement.

Some sanctions went into effect in August, but the sanctions with potentially the most significant global implications go into effect in November, when the sanctions target Iran’s oil exports.

In May of this year, Iran exported 2.7 million barrels of oil per day, which accounted for nearly 3% of the world’s daily crude oil consumption. The new sanctions are expected to impact about 1.5 million BPD of Iran’s exports.

Under pressure from the U.S., many countries have begun to reduce oil exports from Iran. As the market has slowly absorbed the implications of this loss, crude oil prices have steadily risen. As recently as August, a barrel of Brent crude oil was still in the upper $60s. Today, the price has risen to $83/bbl — a four-year high. West Texas Intermediate is now over $73/bbl.

This was entirely predictable. The world simply does not currently have a lot of spare crude oil capacity. But there is a widespread belief that the Organization of the Petroleum Exporting Countries (OPEC) has excess capacity that can be used to offset the loss of Iranian oil.

In fact, President Trump has tweeted his ire at OPEC on several occasions, most recently on September 20th when he wrote:

We protect the countries of the Middle East, they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember. The OPEC monopoly must get prices down now! Related: What Drove Brent Above $85?

Saudi Arabia claims about 1.5 million BPD of spare capacity but that would take their production to an all-time high. A number of people have asked if I believe their claim. Yes, I think they do have some excess capacity, but the bulk of that is reserved for true emergencies. High oil prices do not constitute an emergency.

A true emergency would be the outbreak of violence in a major oil-producing country that took millions of barrels offline. In other words, a sudden, unexpected event that rocks that oil markets.

Publicly, Saudi Arabia and Russia rebuffed President Trump’s request.  Saudi Energy Minister Khalid al-Falih stated “The markets are adequately supplied. I don’t know of any refiner in the world who is looking for oil and is not able to get it.”

Privately, Saudi Arabia is expected to increase production somewhat to offset Iran’s lost barrels. It won’t be enough to make up for all of Iran’s lost exports, and it will put the world in a more precarious situation in case of a real emergency. But it may be enough to stave off a quick return to $100/bbl, as some analysts are predicting.

By Robert Rapier

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  • Mamdouh G Salameh on October 04 2018 said:
    There is no doubt whatsoever that certain vested interests among them the Trump administration and the International Energy Agency (IEA) are overstating the threat of high oil prices. President Trump wants to save his neck at the Congressional mid-term elections in November while the IEA wants to secure the lowest oil prices for its members.

    And despite the continuous hype about the impact of US sanctions on Iran’s oil exports, the sanctions are doomed to fail miserably and Iran will not lose a single barrel from its oil exports.

    If Japan and South Korea under pressure from the US decide to reduce their imports of Iranian crude, China, India and Turkey will more than compensate by increasing theirs.

    The claim by President Trump that the United States protects the oil-producing countries of the Arab Gulf is a brazen and crude attempt of blackmailing these countries and getting US hand on their money. The only threat facing these countries is Israel which is provided with money and the most sophisticated weaponry by the United States to maintain its threat and military ascendancy in the Middle East. America and Israel are one and the same and they pose the most serious threat to countries of the Middle East.

    Whatever spare capacity OPEC may have should only be used to ensure stability of the global oil market and not serving Trump’s political interests.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • EHLipton on October 05 2018 said:
    Took a long needed summer vacation, been 5 yrs since the last. Price wasn't low enough for fun. Been staying home mostly,, riding PUBLIC transportation keeping the fuel burner parked,, past registration date of one year,, so I cancelled the insurance policy on it. Don't use it anymore,, been thinking of selling it,, gets 30 mpgs! But tires, tune ups and maintenance along with mandatory insurance,,, don't like tying my mule by "THREAT" to other peoples Garbage! I am going all electric and as soon as I can,, self sufficiently.

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