The economics of the oil price spike are relatively simple.
Iran currently produces 3.3 million barrels per day (mbd) of oil. Around 2 mpd of that is exported.
That’s now under threat.
Global spare capacity is put as low as 3 mbd, with Saudi Arabia and the UAE the only major producers realistically capable of ramping up production quickly.
So, the market is tight and would struggle to deal with any other disruptions.
As Reuters’s energy writers Ahmad Ghaddar and Seher Dareen noted over the weekend that Iran has in the past threatened to disrupt shipping through the Strait of Hormuz if it is attacked.
The Strait is the exit route from the Middle East Gulf for around 30% of the world’s oil supply (around 21 mbd) and 20% of global LNG supplies.
Historically, Iran has not closed the Strait during previous conflicts as its economy is heavily reliant on free passage through the area.
However, that stance may have changed.
“Iran has also previously stated that it would attack other oil suppliers that filled any gap in supplies left due to sanctions or attacks on Iran,” the Reuters analysts said.
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The head of geopolitical analysis at Rystad and a former OPEC official, Jorge Leon, points out Friday’s spike would only the start of things if Iran follows through on its threats to shipping through the Strait.
“If Iran responds by disrupting oil flows through the Strait of Hormuz, targeting regional oil infrastructure, or striking U.S. military assets, the market reaction could be much more severe, potentially pushing prices up by $20 per barrel or more.”
The OPEC+ cartel, that includes the likes of Russia and Venezuela as well as most middle east producers, has recently been trying to boost production, but that has stretched the capacity of some smaller producers.
Investment, such as in exploration and plant expansion, in many producers, excluding Saudia Arabia, has been declining for years.
“Following the July hike, most OPEC members, excluding Saudi Arabia, appear to be producing at or near maximum capacity,” J.P. Morgan analysts wrote in a weekend note.
Reuters quoting another source said, “outside of Saudi Arabia and the UAE, spare capacity was negligible.”
“Saudi are the only ones with real barrels, the rest is paper,” the source told Reuters.