Yesterday, President Donald Trump told the world why he was withdrawing from the Iran nuclear accord and the capital markets took notice. Oil went up, the dollar went up, and the stock market was unchanged. Many Asian refinery companies, who are significant buyers of Iranian crude oil, indicated that they were going to have to look for other more reliable sources of crude
When OPEC cut crude oil production last year, they hoped that the oil glut would be run off and prices would rise. The price action on crude from the OPEC announcement in December 2016 to today did jump from $45.23 to $71.05, or about a 60 percent gain. I think that given the withdrawal from the accord and assuming that Iran doesn't change its mind, the price of crude might move to the $85 level by the end of the summer.
The other part of this story, at least for now, is that no one is talking about the difference between what was going on in 2015 and now. In 2015 there were still restrictions on exporting crude oil from the United States. If one is old enough to remember, America went through two oil crises: in 1973 after the Yom Kippur war, and the second one during the term of President Jimmy Carter in 1978. At that time America was importing 65 percent of its energy needs from OPEC. When OPEC restricted the flow of crude oil, there was gas rationing in the United States. Because there was no energy policy in place, the only thing that Carter could do was to restrict the exportation of crude oil from America’s wells. That restriction stayed in place until the end of 2015 when Congress repealed it from that year’s spending bill.
With new technologies, the American oil industry is commercially successful with fracking in the Dakotas and West Texas, among other places. As a result, there has been a significant increase in crude oil production within the United States. Based on current production rates, the United States could very well be the largest producer of crude oil in the world by the end of 2018. American oil is currently exporting 2 million barrels of crude a day and growing rapidly.
When severe sanctions were in place against Iran, crude oil prices went higher because supply diminished. The lifting of the oil restraints brought new supply to the market. However, as Iran and Iraq increased production, a purposeful glut developed which was meant to destroy the American oil industry. The result of this excess production was that prices started to fall. OPEC misjudged the will of American oil producers. OPEC, in fact, risked the economies of its member nations by trying to destroy American oil production. That decision put OPEC nations in a precarious position. OPEC was forced to capitulate as its strategy backfired. As a result, in order to attempt to increase prices, OPEC was forced to impose production constraints. Though this slowly drove prices up to today’s levels, the OPEC nations suffered.
Thus, as noted above, starting in 2016 with export controls lifted, the United States is now exporting close to 2 million barrels a day. There have been projections that with strong sanctions in place, Iran’s exports could drop by 2 million barrels a day. The American oil industry could capture a significant portion of this shortage for three reasons: first, the price is lower; second, the shipping cost to Asia from American’s West coast is less than shipping oil from the more distant Middle East. Finally, America is more stable and therefore a more reliable source of crude than from Iran.
Another factor is a strong dollar, the currency most nations accept for crude oil prices. New sanctions, if applied, will create turmoil in Iran and its people will not want to put up with the sacrifices the government will want to impose.
I don’t know if Iran will come to the bargaining table and make the necessary concessions in the terms and conditions of the nuclear accord agreement, one the president will support. Only time will tell, but the president has given the world 90 days to bring Iran back to the table for serious discussions on modifications of the accord. There is one thing of which I’m sure. If Iran comes back to the table, there will be no unmarked aircraft stuffed full of currencies delivered to that country.
Dan Perkins is an author of both thrillers and children’s books. He appears on over 1,100 radio stations. Mr. Perkins appears regularly on international TV talk shows, he is current events commentator for seven blogs, and a philanthropist with his foundation for American veterans, Songs and Stories for Soldiers, Inc. More information about him, his writings, and other works are available on his website, DanPerkins.guru. To read more of his reports — Click Here Now.
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