If exports of oil from the Persian Gulf region had been cut off 20 years ago, gas prices in the U.S. would have more than doubled. But prices at the pump have not not risen by even 50% during the Iran War, going from about $3.10 before the Iran War to $4.50 now, even though few oil tankers are passing through the Persian Gulf’s Strait of Hormuz. The supply of oil from the Persian Gulf has largely been cut off.
Why haven’t oil prices risen far more? After all, gas prices nearly doubled during the 1979 oil shock caused by the Iranian Revolution. U.S. average retail prices jumped from approximately $0.67 per gallon in 1978 to about $1.25 per gallon by 1980. The Iran War has curtailed the supply of oil from the Persian Gulf far more than the Iranian Revolution did. But gas prices have risen far less.
Some analysts predicted the Iran War would drive gasoline prices above $200 per barrel. But it didn’t. The price of oil is only about $90 per barrel now.
One factor limiting the price increase is because U.S. oil production has risen enormously over the last 20 years, increasing by more than 160%. But other factors as well, notes The Doomslayer:
- The Hormuz crisis is straining global energy markets, but also showing the resilience of the system. The Economist notes that, despite the loss of 14 percent of global petroleum output, crude oil prices have so far stayed far below the extreme levels that some analysts predicted. One reason for that development is that exports from outside the Gulf have surged, particularly from the US, where crude oil exports recently hit a record-high 6.5 million barrels per day.
- There are also signs of longer-term adaptation to oil supply risks. A second pipeline in the UAE, expected to begin operating next year, would bypass the Strait and potentially double the country’s non-Strait export capacity to 3.6 million barrels per day. And worldwide, electric vehicles are adding a small but growing buffer against future oil shocks.
Twenty years ago, people wrongly wrote off the oil industry as a dinosaur. Oil production fell after 1970, so people wrongly predicted that oil production would continue to fall ever thereafter — the “peak oil” theory. Based on this prediction, there was even a weekly newspaper column called “peak oil,” written by Tom Whipple, the husband of Democratic politician Mary Margaret Whipple.
But then the fracking revolution came, and oil production boomed. The “peak oil theory was effectively falsified when United States oil production began to increase in 2009 and surpassed the 1970 peak in 2018.”
Technological change has continued to expand oil production in the U.S., making America the world’s biggest oil producer by a substantial margin. “Oil Was Written Off. Now It’s the Most Productive U.S. Industry,” reported Bloomberg News.
