When the United States and Israel attacked Iran in February, a temporary surge in oil prices was a given. Seven months on, with the international price for a barrel of crude around $100 and tankers still cowering in the Strait of Hormuz, drivers seem resigned to paying $5 for a gallon of gas for the foreseeable future.
They needn’t be: Oil’s big bust is coming. The stage is set for a price crash, and not the kind that would benefit President Trump before the midterm elections.
Oil busts happen first in drips, then in blowouts. In March, at the oil industry’s annual jamboree in Houston, executives celebrated how the Trump administration had simplified their lives. Regulatory approvals that used to take years were being waved through in days. Exploration and production were booming, and the surge in prices from the war was already plumping profits. Oil traders were feasting on the volatility.
Older heads, however, recalled a darker time. In early 1986, oil prices fell from roughly $30 a barrel to $10 after Saudi Arabia decided to flood the market to punish OPEC members who were flouting production limits. The combination of a U.S. slump and the fall in global oil prices took Houston into its own version of the Great Depression.
Pawnshops, bursting with furs and Rolexes, had to turn away consigners. In the evening, the sunlight shone through empty skyscrapers, unfiltered by people or furniture. The former Texas governor John Connally filed for bankruptcy and sold his possessions at auction. The psychological effects were deep and lasting.
Something similar will happen if the Iran war ends and shipping resumes freely through the strait. Oil prices will retreat, initially to where they were in January, around $60 to $70 per barrel.
But a more dramatic fall now looks likely, beyond the careful forecasts of supply and demand.
During the recession that followed the 2008 financial crisis, prices fell from around $140 a barrel to $40, and during Covid they plummeted from $60 to $20. A similar drop today could take prices to $30 and below. At that price, the Saudis could make money but not U.S. oil producers.
The commerce secretary, Howard Lutnick, said recently that the administration wants oil prices to collapse. The plan is to open the spigots of global oil, starting in Venezuela, with the goal of $2-per-gallon gasoline, forever — which translates to crude oil pricing at $30 to $40 a barrel.
While an appealing campaign pledge, a price that low would devastate the U.S. oil industry. The break-even price for American oil producers drilling new wells is north of $60 a barrel; for shale drillers, even higher. In Mr. Lutnick’s world, the cheering oil barons of Houston, and their employees and dependents, would soon face economic Armageddon.
In a balanced state, the world produces and consumes around 105 million barrels of liquid fuels daily, including crude oil. This year, both supply and demand are down. The International Energy Agency’s latest annual estimate is that global demand for oil will fall by 2.5 million barrels per day, while supply will fall by 5.7 million barrels per day. Through the summer, the world drew on its inventories to fill the gap between supply and demand. Those stores, such as the United States’ Strategic Petroleum Reserve, are now running dry.
Changes of a few percentage points in supply and demand may not seem like much. But it is in the margins where you find the seeds of collapse.
While the Persian Gulf has been blocked, countries in other parts of the world have been investing to increase production. Guyana’s vast fields are now producing at scale, after years of investment led by Exxon Mobil. Argentina’s president, Javier Milei, is pushing to expand production in Patagonia. Venezuela’s antiquated oil infrastructure is expected to be overhauled with a rush of funding.
An end to the war in Ukraine could bring much of Russia’s sanctioned oil out of the shadow fleets and back onto the open market, once it repairs its shattered infrastructure. The question then will be whether there will be buyers for all this supply.
In the meantime, champions of renewable energy are closer than ever to the tipping-point moment when alternative energy becomes inexpensive, reliable and widely available. This year, renewables, mostly wind and solar, are providing just over half the electricity consumed in California and Western Europe.
The biggest obstacles to greater use are storage and transmission to ensure consistent delivery. Oil’s instability may be the final push investors need to accelerate the transition. Surging electricity demand from Big Tech and A.I. giants is also supercharging investments into alternatives, including small, modular nuclear reactors.
The effects of high oil prices are not evenly distributed. Asian countries, which rely heavily on imports of Gulf oil, have suffered more in recent months than Western countries, which have regional supplies and more diversified energy systems. In the 1970s, Japan adjusted to the near quadrupling of oil prices by developing nuclear power and investing in lighter, less energy-intensive manufacturing. The hardest-hit victims of today’s price rises will be making similar calculations.
Mr. Trump’s quixotic foreign policy has also left many countries wondering if depending on oil, which relies so much on American action and inaction around the world, is worth the hassle. America’s exasperated Middle Eastern allies will soon be walking into the arms of China, a huge oil buyer. The latest attack on Saudi Arabia’s crucial east-west oil pipeline will likely affect supply for months, increasing the sense that this supposedly limited war has spun out of control.
There is also the prospect of recession, another demand killer. The simplest reading of the recent tremors in the bond markets is that winter is coming. The United States and much of Europe are too deeply in debt. The A.I. bubble is a rogue agent or two away from deflating. Borrowing costs are rising, and a worldwide recession would dent demand for oil at a moment of rising supply.
Watch out: When oil prices start to fall, producers race to the bottom. They increase production, which briefly sustains revenues until the additional supply forces prices down further. One by one, higher-cost producers are forced out, unable to sustain the losses. The 1986 price collapse was devastating for the Soviet Union. A similar collapse today could crush Vladimir Putin’s Russia.
Despite a production-cost advantage, Saudi Arabia cannot tolerate low crude prices the way it used to. That nation’s population has nearly tripled since 1986, and its development planners are thirsty for capital. Sudden and searing economic pain in the Middle East may destabilize political decision making.
Throughout the petroverse, then, conditions are now pointing toward another oil collapse. It is just a question of when. That may be welcome news to drivers filling their gas tanks. But like the recent price escalation, it is also rife with unintended and disastrous consequences for the oil industry, and the economies and countries that depend on it.
Philip Delves Broughton is also the author of “Embargo: The 1973 Oil Crisis That Changed the World (And What We Can Learn From It Now)” and “Ahead of the Curve: Two Years at Harvard Business School.”
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