The New York Times commented that oil crises often brew slowly at first and then evolve into large-scale outbreaks. (AFP file photo)
[Financial Channel/Comprehensive Report] Since the United States and Israel attacked Iran in February, international oil prices have risen sharply. Now, seven months later, crude oil is still around US$100 per barrel. Shipping in the Strait of Hormuz continues to be blocked, and US gasoline prices remain at a high level of about US$5 per gallon. In this regard, the market believes that high oil prices seem to continue for some time, but historical experience shows that the most dangerous moment in the oil market is often not when prices rise all the way, but when supply and demand suddenly reverse.
The New York Times commented that if the war in Iran ends and normal shipping in the Strait of Hormuz resumes, oil prices may first return to around US$60 to US$70 per barrel in January this year. This is only a matter of time, and a larger decline is not ruled out, which may bring unexpected catastrophic consequences to the oil industry and oil-dependent economies and countries. But if the price drops to US$30 to US$40 per barrel, it will cause a devastating blow to the US oil industry.
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The article pointed out that oil crises often brew slowly at first and then evolve into large-scale outbreaks. In early 1986, Saudi Arabia decided to significantly increase production to the market to punish those OPEC members that violated production limits, causing oil prices to plummet from about US$30 to US$10 per barrel. The double blow to the US economic recession and the collapse of global oil prices plunged Houston into a crisis comparable to the Great Depression.
During the recession after the 2008 financial crisis, oil prices also fell from about US$140 to US$40 per barrel; during the COVID-19 epidemic, they plummeted from US$60 to US$20 per barrel. Today, if oil prices experience a similar decline again, they could fall to $30 a barrel or even lower. At those prices, Saudi Arabia might profit, but not U.S. oil producers.
In addition, U.S. Commerce Secretary Howard Lutnick recently stated that the U.S. government hopes that oil prices will plummet, and its plan is to gradually open up global oil supply, starting with Venezuela, with the goal of maintaining gasoline prices at $2 per gallon forever. This means that crude oil prices will fall to $30 to $40 per barrel.
While this was an attractive campaign promise, such low prices would be devastating to the U.S. oil industry. With U.S. oil producers drilling new wells at break-even prices of over $60 a barrel; shale drillers with break-even prices even higher, those cheering oil barons in Houston, as well as their employees and families, will soon face economic doom.
Currently, the world produces and consumes approximately 105 million barrels of liquid fuels, including crude oil, every day. The International Energy Agency estimates that global oil demand will decrease by 2.5 million barrels per day this year, while supply will decrease by 5.7 million barrels. The summer market mainly relies on inventories to fill the gap.
On the other hand, other oil-producing regions are expanding investment while the Persian Gulf is blocked. Guyana's large oil fields have entered large-scale production, Argentina is pushing to increase production in Patagonia, and Venezuela's old oil infrastructure may also attract new funds. If the war in Ukraine ends, some of Russia's sanctioned oil supplies may also return to the open market. By then, the question may change from "is there enough oil?" to "does the market still need so much oil?"
In addition, the expansion of renewable energy is also changing the long-term demand structure. The article pointed out that this year more than half of the electricity in California and Western Europe has come from renewable energy sources such as wind and solar power, and the power demand of AI and large technology companies has also promoted new investments including small modular nuclear reactors. High oil prices themselves may further accelerate energy substitution.
Another risk is economic recession. The United States and Europe are highly indebted and borrowing costs are rising. If the global economy weakens, oil demand will fall simultaneously with increased supply. Historically, once oil prices began to fall, some oil-producing countries increased production in order to maintain income, resulting in a cycle of falling prices and increasing supply.
If oil prices fall back, it is certainly good news for consumers, but the article reminds that if prices really fall to US$30 to US$40 per barrel, high-cost oil producers in the United States will be under tremendous pressure, and countries that are highly dependent on oil revenue, such as Saudi Arabia and Russia, may also face financial impacts. Therefore, the collapse in oil prices may bring another round of economic shock.
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