The price of oil reached a record high of $147 on July 11, 2008. Could such a sharp, unexpected spike occur again?
Increased shale production in the U.S. helps us guard against it. But there are many factors that could cause prices to spike, and Middle Eastern events are far beyond our control. As long as the global oil market relies so heavily on a narrow waterway connecting the Persian Gulf and the Gulf of Oman, “those risks remain,” according to oil and international affairs expert Steven Kopits.
Kopits, president of the consulting group Princeton Energy Advisors, raised eyebrows last November when he warned, in a post for CNBC, that the conflict between Saudi Arabia and Iranian-backed Yemeni rebels could spread across the entire region. Situated precariously is the Strait of Hormuz, which connects the Persian Gulf and the Gulf of Oman. Iran is on one side of the strait, Oman the other. At one point it’s only 34 miles across, narrow enough to swim across, if you avoid the sharks.
Kopits, who has a Masters degree in international economics from Columbia University, says that about 17 million barrels of oil pass through the strait every day, about 18 percent of world consumption. “Were a war between Saudi Arabia and Iran to erupt, this chokepoint could easily be closed,” Kopits wrote.
The impact of such a closure on the global economy would be severe and immediate. For example, the Suez Crisis of 1957 saw 10 percent of the world’s oil production taken off the market. Within a month, the U.S. and Europe were facing a recession which would last the better part of a year.
Market forces alone aren’t likely to cause oil prices to rise to $147 anytime soon, not with the U.S. drilling at a record pace, Kopits said. But the potential for a price surge based on another unforeseen event — like a terrorist attack or geopolitical confrontation — is always there.
“If something happens in the Strait of Hormuz,” Kopits said, “you will see an oil shock of the scale you couldn’t imagine, that is way worse … an order of magnitude worse than anything we’ve seen historically.”
The strategic importance, and thus the vulnerability, of the Strait has long been known: A 2012 post in NatGeo noted that Iran “has one undisputed weapon: the ability to block the most important oil transit choke point in the world.”
Severe supply constrictions anywhere in the world always bring swift damage to the U.S. economy: The 1973 oil crisis, brought on when OPEC halted oil exports to the U.S. after the country’s support for Israel during the Arab-Israeli War, reduced American supply by 7 percent. The shortage caused long lines and short tempers at gas stations, as we showed in our 2014 documentary PUMP:
The “second oil shock,” in the late 1970s and early ’80s, also was brought on by Middle East instability: The Iranian government was overthrown, and student-led activists took 52 Americans hostage. Oil production the country slowed, sending U.S. oil prices from $13 to $32.50.
On Friday, July 11, 2008, West Texas Crude — the U.S. benchmark — climbed as high as $147.27 before settling at $145.08. Brent crude — the international benchmark — closed at $144.49. That same month, the average national price for a gallon of unleaded gasoline hit $4.11; today it’s $2.64.
What caused the 2008 spike? The New York Times attributed it to “continued tensions in the Middle East and concerns of renewed violence in Nigeria.” Reuters blamed “growing worries about threats to supplies from Iran and Nigeria and a strike by Brazilian oil workers next week.” The AP cited “rising hostilities between the West and Iran and the potential for attacks on Nigerian oil facilities.”
Where is the next global hot spot that could prevent oil from getting where it needs to go on time? Syria is an obvious danger zone, Kopits said. Hostilities could draw in the U.S., Russia, Iran or Israel.
“You could go 10 years and everybody’s calling each other names, but nothing really happens, or you could have a bad instant in a day, and a week later the oil price is heading through the roof,” Kopits said. “And the Iranians, I think, export 2.6 million barrels a day? If you lost Iranian exports at that scale, that’s the same as 1979 That would be … yeah, you’d get a real nice oil price spike out of that, and that could certainly put the global economy into recession.”
Since 10 of the last 11 recessions in the U.S. were preceded by an oil-price spike, including 2008, this isn’t an academic issue: Oil prices can rise quickly at any time, for reasons we can’t see coming and can’t control.
All the more reason why we should increase the availability and usage of alternatives to oil, so we’re not at the mercy of such a vulnerable global system. History tells us that the next spike is always just around the corner.