Crude oil is more expensive than it has been in over four years, and market experts are only expecting it to rise further. Gasoline prices are already the highest they’ve been in four years, and soon everything from plane tickets to food will get more expensive too.
The U.S. benchmark for oil, West Texas Intermediate (WTI), is around $75 per barrel, and a growing number of analysts are predicting that $100 prices are likely before the end of the year — maybe even before Thanksgiving. But it did not need to be this way.
{mosads}Prices are rising and speculators are excited because storage of excess oil is down from highs a few years ago and because, most importantly, Iran’s oil industry will be facing new sanctions on Nov. 4.
Five months ago, when the Trump administration first announced that new sanctions would be placed on Iranian oil, many oil analysts doubted the potential impact on the markets.
Then the U.S. government demonstrated its resolve to use these sanctions against companies that do business with Iran, and now typical analysis says that as much as 1.5 million barrels of Iranian oil could be absent from the market every day.
This has been just enough to send speculators into a frenzy, pushing oil prices higher than they need to be. President Trump has seen the writing on the wall for weeks, and he is sending tweets and speaking forcefully at rallies, trying to pressure the Organization of Petroleum Exporting Countries (OPEC), and Saudi Arabia in particular, to drastically increase production.
Trump wants Saudi Arabia and other oil producers with spare capacity to flood the market so that the price of oil cannot rise because of the sanctions or because of speculator excitement.
Saudi Arabia, for its part, has increased production about 100,000 barrels per day in October, but this is an insignificant amount. The country has more than 1 million barrels of spare capacity, and Trump wants Saudi Arabia to use it.
Saudi Arabia resists because it is protecting its own economic interests. The Saudis seem reluctant to satisfy Trump even though the U.S. is the one acting to bring Iran in line, a major geopolitical need for Saudi Arabia.
Yet the United States did not need to be in this situation. We got here because the U.S. oil industry has so little spare capacity. In recent months, the U.S. has been able to produce more oil per day than ever before, at times producing more than any other country in the world.
The U.S. can now produce more than 10 million barrels per day. The problem is that the U.S. cannot easily ramp up that production any higher. Even though our oil industry is more dynamic and resilient than it used to be, it faces significant infrastructure constraints.
Oil producers lack adequate pipeline capacity, and ports in key regions require dredging and updating to accommodate the tankers necessary to bring more American oil to market. This lack of spare capacity and infrastructure means the U.S. is incapable of stabilizing the market when conditions or speculation cause it to rapidly rise.
The U.S. lacks additional production capacity because of poor foresight in previous years. We have plenty of oil under the ground, and the oil is located in enough distant fields to extract simultaneously, if need be. We could easily have better infrastructure now if permits for pipelines had been approved.
However, our policies over the previous decades impeded the exploration and preparation for production that would be needed to create that extra capacity for times just like these.
The American Petroleum Institute has estimated that if we approved the right permits and leased the right federal land now, we could produce another 1.5 million barrels per day in 20 years.
Where would we be now if over the last decades the federal government had approved work on fields in Alaska and offshore in the Atlantic Ocean or if New York had approved hydraulic fracturing of shale?
We might not have enough spare capacity to entirely replace Iranian oil, but we would be able to start production quickly enough to mitigate market disruptions.
Today, the issue in the global oil market is sanctions on Iran. Tomorrow it will be something else — international conflict, political instability, natural disaster or demand increases. The price of oil always goes up again.
It is important that the U.S. be prepared to calm the market with production increases so we do not have to rely on Saudi Arabia and OPEC. We need spare capacity so we do not face the shock of rapid cost increases for the American consumer.
Ellen R. Wald, Ph.D. is the author of “Saudi, Inc.: The Arabian Kingdom’s Pursuit of Profit and Power” and a senior fellow at the Atlantic Council’s Global Energy Center.