The Trump administration may feel forced to open the taps on the Strategic Petroleum Reserve after November sanctions on Iranian crude take that oil supply off the market, potentially spiking U.S. gasoline prices, according to a pair of energy policy experts.
The oil price impact of any release of strategic reserves would be short-term and muted in the face of the Trump administration's goal of forcing 2.2 million barrels per day of Iranian oil off the market, the researchers said Oct. 4 at the Atlantic Council in Washington, D.C. Energy Secretary Rick Perry ruled out any oil release Sept. 26, saying the oil markets have already incorporated the absence of Iranian oil and increased production from Saudi Arabia and other producers.
"The administration is learning the hard way that it's difficult to drive Iran's oil off the market and keep gasoline below $3 [per gallon]," Robert McNally, president of energy consulting firm Rapidan Group, said at the forum. "The administration has convinced folks [that Iranian] oil is coming off. They've convinced folks it's going to be close to zero." McNally also served as an energy adviser to President George W. Bush.
"The threat of Iran sanctions and the uncertainty about the level of compliance is spooking the market," Daniel Goldwyn, a longtime adviser to Democratic administrations who most recently served as the U.S. Department of State's special envoy for energy affairs under Hillary Clinton. "The market is looking at strong demand and threatened supply."
Where the Trump administration may have miscalculated is in how much of the gap in oil supplies Saudi Arabia will fill, McNally and Goldwyn said. "We're learning Saudi Arabia can't or won't, can't really," make up the 2.2 MMbbl/d when the Saudis have only 1.4 MMbbl/d of spare capacity, McNally said.
As early as 2019, the world is going to be awash in oil, McNally added, and the boom-and-bust cycle intensifies because of a lack of a true swing producer acting to match supply to demand.
"Every producer now, Saudi Arabia being the only exception, is producing everything it can," McNally said. "There is a tsunami of crude coming next year … [but] if Iran goes to zero and we have a war in the Persian Gulf, all bets are off."
The situation is reminiscent of the late 1990s, he said, when OPEC produced as much oil as it could, only for demand to collapse during the Asian currency crisis. "Crude to $10 a barrel. It took OPEC two years to climb out of that," McNally said. "As long as you have unbalanced fundamentals [supply and demand] and no swing producer, we will have boom-bust cycles."
While researching his 2017 book "Crude Volatility," McNally discovered that the only periods of price stability in the oil markets occurred when a monopoly, as in John Rockefeller's Standard Oil, or a regulator or cartel, as in the Texas Railroad Commission in the mid-20th century or OPEC, matched supply to demand.
"The oil market won't balance itself without a swing producer," McNally said his research showed. "OPEC has been AWOL since at least 2008," McNally added. "The good news in Washington is that OPEC is no longer managing oil markets. The bad news is that OPEC is no longer managing the oil markets."
While many had hoped that U.S. shale oil would step in to fill the role of swing producer, McNally said, "U.S. shale production never was, is not now and never will be a swing producer. Swing production has to adjust with government authority." He added, "If [U.S.] shale producers tried to be swing producers, they'd all go right to jail."
The U.S. is not helpless in the face of an increasingly volatile market for a "must have" commodity, Goldwyn said. "If you want oil to be less salient to the economy, if you want the economy to be less vulnerable to those swings, then you ought to think about a different transportation fuel. You ought to be raising [corporate average fuel economy] standards, not freezing them. Investing in newer and better batteries. You ought to be investing in autonomous vehicles. You should be looking at [natural] gas for ships and trains."