The Trump administration has been serious about addressing the Iranian nuclear threat, and an economic blockade is its weapon of choice. The American government is working to make sure that the sanctions take full effect by the month of November, completely turning the Iranian spigot off for the world. With Iran’s domestic budget significantly dependent on oil revenues, the hope is that the hardships caused by loss of that income will force the country to cooperate and dismantle its nuclear program.
Such a move would come with significant problems for countries around the world that depend on petroleum imports, however. According to the Joint Organizations Data Initiative, Iran contributes 2.5 million barrels of oil a day to the world market. Even partial compliance with the U.S.-imposed sanctions by oil-importing nations would take about a million barrels of oil a day out of the equation.
The Problem Could Be Much Worse
A shortfall of about a million barrels of oil a day could be made up by Saudi Arabia if the country raised production to full capacity. Should every oil importer around the world toe the line on America’s boycott, it would take out 2.5 million barrels a day. This is not a hole that the oil-rich kingdom could fill on its own.
The Worst-Case Scenario
Many do not realize that Iran enters this scenario in a position of power. The Gulf of Hormuz, one of the world’s most strategic commercial shipping lanes, is the only route used by Iraq, Kuwait, Bahrain, Qatar and other territories as they export their oil to the world. All commercial shipping traffic originating in this region — about 20% of the world’s petroleum consumption — passes through this 29-mile-wide sea passage. Since it is in Iran’s backyard, however, the country is in a position to cause trouble. The Iranian government has already threatened to hold naval exercises and shut off all oil traffic.
If this were to happen, it would create massive a shortfall of available oil supply and send prices as high as $250 a barrel. Certainly, world powers wouldn’t stand by idly and watch Iran disrupt an international shipping lane. The U.S. Navy, for instance, would move in to ensure safe passage to all ocean liners transporting oil. Nonetheless, there would be some disruption for a period of time.
A Situation Never Faced Before
While the loss of production from Iran could be in excess of two million barrels per day, spare production capacity with OPEC members stands at around 3.4 million barrels per day. About two-thirds of this capacity comes from Saudi Arabia alone, and Russia accounts for most of the spare capacity seen among non-OPEC countries.
In theory, Saudi Arabia and other countries are able to tap into spare capacity. This might be difficult in practice, however. To begin, Saudi Arabia would have to attain production of 12 million barrels per day, a level it has never functioned at before. For instance, it isn’t known if pipelines and other processing infrastructure are able to handle such levels. They certainly have never been tested.
The country would consider releasing some of its domestic crude stock inventories, but it could only be a short-term measure. There is also the problem of maintaining spare capacity to meet unknown future contingencies. With every country pumping flat out, there would be little capacity left for the unforeseen.
Preparing for Higher Prices
According to Sigma Drilling Technologies, manufacturers of critical drilling rig components such as the suction stabilizer and the pulsation dampening systems, American operators have been raising capacity for a while now and are well-positioned to take advantage of higher demand at higher prices. With further investments made in capacity extension and maintenance of existing infrastructure, they should see a windfall before long.
