Despite continuing Iranian attacks in the Strait of Hormuz, oil shipments from the Middle East have now surpassed prewar levels. The might of the U.S. military is to thank for the recovery of oil flows through the strait itself. But the proliferation of alternative routes around the region, new production outside the Middle East and declining fuel consumption are thanks to the might of the free market.
Oil flows throughout the Middle East averaged more than 24 million barrels a day last week, up from 23.3 million before the war, according to the ship tracker Kpler. Heavier reliance on Saudi and Emirati pipelines has allowed more crude to bypass the strait: 40 percent of non-Iranian Gulf crude is going through pipelines, up from 17 percent before the war.
At the same time, the U.S. military has helped restore flows through the strait even as an American embargo has mostly choked off Iranian crude. Oil flows through the strait have rebounded to 82 percent of prewar levels, facilitated by a clever ship-to-ship transfer system in which the military escorts shuttle tankers through Hormuz to cargo ships in the Gulf of Oman.
While the work-around has proved effective, oil flows cannot rely on costly military escorts in perpetuity. Attacks by Iranians and their proxies, combined with an expectation that hostilities will escalate following the midterm elections, keep prices elevated. These were foreseeable consequences of President Donald Trump’s war of choice. Picking this fight in February all but guaranteed trouble in the strait.
While the military can protect freedom of navigation, no central planner could replicate the decentralized adjustments being made because of higher prices. Producers outside the Middle East added 2.3 million barrels a day between February and August, led by the United States, Brazil, Kazakhstan, Venezuela and Nigeria, according to the International Energy Agency.
Oil production across the Western Hemisphere is projected to surge in the next decade, as high prices justify investments in marginal projects. Chevron, for example, plans to put nearly $14 billion into Argentina over the next decade, tripling production there. Four out of five institutional investors say that disruptions in Middle Eastern markets make them more likely to invest in Canada, according to a recent survey by ATB Cormark Capital Markets.
On Wednesday, British Prime Minister Andy Burnham authorized a long-stalled offshore natural gas project in the North Sea while announcing major investments in renewable energy elsewhere. North Sea drilling has long been opposed by progressives in the Labour Party, but high prices and the worst inflation in a year created cover for Burnham to give the green light.
Thanks to a freer, more diversified energy market, the Iran war has not re-created the crippling shortages Americans endured in the 1970s. While high gas prices are certainly a major political headache for the party in power, the U.S. has been relatively insulated.
Over the past decade, the U.S. has expanded energy production through fracking and horizontal drilling, leading to record-high domestic crude output and growing exports. Before the war, Americans were already importing far more petroleum from Canada than the Middle East. Last year, only 8 percent of U.S. crude imports came from Gulf countries.
President Richard M. Nixon instituted disastrous price controls on oil after a 1973 OPEC embargo. Whenever prices are artificially capped below the market equilibrium, demand outstrips supply, leading to the shortages and gas lines that endured through the decade. Trump floated a ban on diesel exports last month, but advisers convinced him that the idea would backfire by causing supply disruptions.
Finally, high prices cause people to use less oil. Electric vehicles become more attractive. So does public transit. The IEA forecast in August that global oil demand would decline 1.6 million barrels per day this year.
The lesson for long-term energy security is that government should welcome abundance, competition and trade. Let prices rise when oil gets scarce. Let producers profit by finding more of it. Let consumers decide when substitutes make sense. Free markets cannot prevent wars, but they can make their fallout much harder for adversaries to dictate.
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