Oil Markets Muted in Wake of Soleimani Assassination

In an earlier era, the risk of war between the U.S. and Iran would likely have sent oil prices skyrocketing, resulting in significant financial pain for consumers and a serious hit to the U.S. economy. But when news broke late last week that the U.S. had assassinated a top Iranian general in Iraq by drone strike, oil prices rose a fairly modest 3%. Today, they’re largely flat.

Why? In a word: Fracking, or hydraulic fracturing, the drilling technique that, combined with horizontal drilling and other tech advances, has unlocked more oil in more places across America. The Middle East is still a crucial source of supply for global markets, but thanks to the resurgence in domestic production, the U.S. is now largely self-sufficient in petroleum. In fact, we now export more crude oil and refined fuels than we import, according to the Department of Energy. (It also helps that our biggest source of imported crude oil by far is Canada. Saudi Arabia ranks a distant third.)

There’s no telling what comes next in the slowly intensifying confrontation between Washington and Tehran. But I think we can identify a couple of outcomes that won’t happen: Violence in the Persian Gulf region won’t result in physical shortages that require American drivers to queue up at gas stations the way they did during oil crises in the 1970s. And oil prices won’t climb high enough to do the U.S. economy any real damage, again unlike in the 70s, when oil price shocks helped stoke double-digit inflation and two recessions.

Since 2005, when U.S. crude production fell to a multidecade low of 5 million barrels per day, output has steadily climbed to today’s nearly 13 million barrels. Energy companies are also producing a bounty of other liquid hydrocarbons, such as ethane and propane, plus about 1 million barrels per day of ethanol. Add it up, and U.S. output roughly equals consumption. Less than a decade ago, the country depended on 10 million barrels per day of imported crude and refined fuels.

Of course, even with all that production, America isn’t independent of global energy markets. Supply disruptions on the other side of the world still affect prices here. And the Persian Gulf is a key chokepoint for the oil market. The tankers transiting its waters carry roughly a fifth of the world’s petroleum supplies, according to the DOE. A full-blown shooting war there would seriously crimp those volumes and likely lead to a significant price increase.

Yet so far, the Soleimani killing and resulting rhetoric from Iran has only caused benchmark West Texas Intermediate crude to rise by about $2, to $63 per barrel in recent trading. Retail gas prices have not yet registered any of that increase, though they probably will rise by several cents a gallon later this week.

For now, it appears that oil traders are betting that something less than World War III is imminent in the Gulf, and that global oil supplies aren’t in serious danger. Given the added production that fracking has brought to market in recent years, that seems like a good bet.

It also helps that the U.S. economy is less exposed to oil price spikes than it used to be. During the 1970s crises, say economists at Wells Fargo, “gasoline and other energy goods” made up 4% of American consumers’ spending. Today that figure is now 2%, thanks in part to significant increases in the gas mileage of modern vehicles. So oil prices would have to really soar to have the same macroeconomic effect that they did four decades ago.