Green Shoots for the Oil Market

Energy companies are reeling from the historic oil price rout. The Wall Street Journal reports that Exxon Mobil just notched its first quarterly loss in three decades. Venerable Anglo-Dutch producer Royal Dutch Shell just cut its dividend for the first time since 1945. Other dividends paid by the industry are being slashed or frozen, too.

The financial pain isn’t surprising, given that benchmark U.S. crude oil fell from more than $60 per barrel in January to $10 recently (and, very briefly, in a strange quirk of futures markets, below $0). Worldwide energy demand is way down as the coronavirus pandemic curtails travel and trade. Consumers sheltering at home aren’t buying much gas for their cars, and shipping companies don’t need much diesel when there’s scant demand for most of the products they normally transport.

Barring a miracle cure, the economic damage is likely to continue. But if you look closely, you can see signs that the worst of the hit to the oil market may be over.

Gasoline consumption in the U.S., the world’s largest oil market, remains anemic. But data from the Department of Energy show that gas sales have ticked slightly higher for two consecutive weeks now after bottoming out in mid-April. Retail gas prices, which had been dropping steadily every day for weeks on end, actually rose by a penny from yesterday to today, according to AAA. At $1.78 per gallon for regular unleaded, the national average price is still quite cheap. But we may be near the bottom for both fuel demand and prices.

Crude oil prices have responded accordingly. After trading at $10 last week, West Texas Intermediate has rallied to nearly $20. There’s no guarantee prices won’t sink yet again, especially if energy producers run out of storage for their surplus production while demand is so weak. But here, too, there are glimmers of hope for the industry. OPEC’s production cuts are scheduled to take effect starting today. Energy firms in the U.S. continue to shut down drilling rigs, which means there will be fewer new wells coming online in the next several weeks. Other companies are capping existing wells, figuring it’s better to keep the oil in the ground than to sell it at a loss.

Expect extreme volatility in oil prices to continue, given the unprecedented damage to the global economy that the coronavirus is causing. But if commerce and travel can slowly start to emerge from spring hibernation, and if producers keep closing the oil taps, we may have seen the worst for oil.

Negative Prices Come to the Oil Market

Well, now I’ve seen everything. I warned not long ago that the oil market was in for more pain. But I wasn’t expecting to see oil prices actually turn negative, which they did on Monday.

Granted, it was only the May futures contract for West Texas Intermediate that managed to trade below $0. WTI futures for delivery in later months managed to stay in positive territory. As did Brent, the crude benchmark most cited outside of the U.S.

Still, sellers paying borrowers to take their oil is not something we’re supposed to see. After all, it costs money to pump oil out of the ground. And it’s hard to think of a commodity more critical to our modern, industrial society.

But there it was: -$40.32 per barrel at one point in Monday trading. What the heck happened, and what comes next for oil?

Basically, traders drove WTI into negative territory out of fear that there would be no place to store oil scheduled for May delivery in Cushing, Okla., where the contract is physically settled. The coronavirus pandemic has slashed global oil demand by somewhere around 30%, but production remains near its normal level. All that surplus crude needs somewhere to go, and the world’s storage tanks and oceangoing oil tankers are filling up fast. Paying to avoid having to take delivery of unwanted oil briefly made financial sense in some cases.

Normality has since returned to the market, with June WTI futures trading near $17 per barrel: Still cheap, but at least above $0. (It’s hard to believe that, as recently as January, WTI was at $63. The current price is lower than what was seen at any time during the Great Recession of 2008-09.)

Can prices go lower still? I think so.

Think of the current oil market as a race between producers trying to curb output, and the remaining oil storage facilities, which are getting close to full. Can producers cut fast enough to avoid having literally no place for surplus crude to go?

OPEC and its allies have agreed to cut their combined exports by nearly 10 million barrels of oil per day starting in May. In normal times, that would be a massive decrease. But world oil demand, normally close to 100 million barrels per day, is probably closer to 70 million now because of the hit to global travel and economic activity. So even OPEC’s cuts leave plenty of extra oil. Meanwhile, U.S. output has started to fall, but so far, only by a small amount. Bigger cuts somewhere, by someone, are needed to keep crude stockpiles from growing further and potentially spilling over.

Oil demand should start to recover once the worst of the public health crisis is past. But how soon will that be? Soon enough to start soaking up all those extra barrels of oil? And even as energy companies shut down drilling rigs or cap existing wells, can supply fall fast enough to match anemic demand?

It’s an open question. But the fact that it even has to be asked means that oil markets will stay extremely volatile. If production continues to vastly exceed demand for another couple of weeks, the glut will get considerably worse. And traders will find themselves in the same position they were in this week: Nervous about owning the rights to a commodity they can’t sell or store. Prices may not go negative again, but don’t be surprised if they flirt with $10 per barrel before the worst is over.

Perversely, weak demand and low prices today could lead to a price spike at some point later, when world oil demand recovers. Capped wells can be difficult to restart. New wells that would have been drilled and meeting future oil demand aren’t getting drilled now. OPEC may be reluctant to quickly resume normal exports as prices rise.

Basically, the only constant you can count on in this oil market is rapid change.

Can OPEC, Russia Deliver?

All eyes in the oil market are on OPEC and Russia as we wait to see whether they can agree on huge production cuts in response to plummeting global oil demand. The outcome of that meeting, and whether the concerned parties actually stick to their production quotas, will determine whether oil prices keep rallying or sink back toward their recent lows.

As a quick refresher of just how deep a bear market crude oil has fallen into: West Texas Intermediate traded as high as $63 per barrel in January and then dropped all the way to $20 in late March. That was the cheapest WTI had been in about 18 years. But crude has since rallied to about $24 on hopes that the world’s major oil exporters will slash their output.

One thing is for sure: Oil prices can’t rise without enormous production cuts, because global energy demand has fallen off a cliff since the coronavirus pandemic hampered travel around the world. In its latest weekly report, the Department of Energy reported that the U.S. consumed only about half as much gasoline as it normally does. Ditto for jet fuel. (Diesel consumption remained strong: A reassuring sign that food and other critical freight is still being shipped around the country by truck and train.)

The global economy consumes roughly 100 million barrels of oil each day. Or it did, before COVID-19 struck. Now, estimates of global demand are dropping fast. OPEC’s secretary-general said that “the supply and demand fundamentals are horrifying.”

Reports from the ongoing negotiations indicate that OPEC, Russia and other oil exporters are closing in on hefty cuts, totaling millions of barrels per day. Agreeing to such a drastic cut and then actually sticking to it will be a challenge for countries whose budgets depend heavily – in some cases, almost exclusively – on pumping and selling oil. If they can do it, don’t be surprised if WTI continues its recent rally. But don’t expect prices to return to “normal” anytime soon. The gaping hole in global demand is just too big for that.

And if OPEC and its allies fail to deliver on agreed cuts, look out below. The world is running out of places to store excess crude during a time of extremely weak demand. If the flood of excess production continues, you’ll soon hear talk about oil prices in single digits.

The End of a Brutal Week for the Oil Market

Investors may heave a sigh of relief when this wild week finally comes to a close. Yesterday, the Dow Jones Industrial average plunged 10%, its biggest one-day percentage loss since 1987. Oil traders might not be impressed, given that West Texas Intermediate crude futures fell roughly 25% on Monday alone, with additional big drops over the course of the week.

It’s amazing to think that, just two months ago, WTI was trading at about $63 per barrel. It fell into the $50s as the coronavirus starting to crimp oil demand in China; the $40s when the disease started hampering travel in other countries; and the $30s after OPEC and Russia failed to agree on an oil production cut, which led Saudi Arabia to announce that it was going to flood the market with cheap crude. Russia, unfazed, announced that its economy could withstand years of low prices. The Saudis then threatened additional production hikes.

So how much more pain can oil producers expect? It’s not often that I get a chance to quote the Fourth Century chronicler Bishop Ambrose of Milan, but this occasion feels apt. Writing about the plague of barbarian invaders who were in the process of bringing about the end of the Roman Empire, the Bishop wrote: “The Huns fell upon the Alans, the Alans upon the Goths and Taifali, the Goths and Taifali upon the Romans, and this is not yet the end.”

“This is not yet the end” is how I see the situation for the beleaguered oil market. WTI currently trades near $32 per barrel. Maybe that’s the bottom, but do you really think the worst of the coronavirus health scare is over? Or that the economic impacts have been fully felt yet? I wouldn’t bet on it.

After all, WTI traded as low as $26 per barrel in 2016, a time when there was no global pandemic and no looming recession, and no oil price war between Russia and Saudi Arabia.

Whatever happens next with oil prices is largely in the hands of Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, the Kingdom’s de facto ruler, says Stephen Schork, editor of the Schork Report energy investing newsletter. He believes Russia refused to cut output because of U.S. sanctions imposed on its oil industry last year, which ate into the country’s share of the global oil market while U.S. producers filled the gap. Perhaps Russia decided that it had nothing to gain from further production cuts that would only boost oil prices for its rivals in Texas and North Dakota. And then perhaps the Saudi crown prince mistakenly believed he could bully Moscow into cooperating anyway, a miscalculation that led to the present price war.

How negotiations between the Saudis and the Russians play out from here is anybody’s guess. But what’s certain is that oil demand is going to continue to suffer as the coronavirus limits air travel and disrupts freight shipping. In the U.S. alone, jet fuel consumption is down 5% so far this year compared with the same period a year ago, according to Energy Department data. Meanwhile, U.S. oil output remains near a record high, and the next two biggest producers, Russia and Saudi Arabia, are vowing production hikes.

Another certainty: Drivers in the U.S. are going to be paying less at the pump. The national average price of regular unleaded stands at $2.30 per gallon according to AAA. That’s off 13 cents from a month ago. Later this spring, the national average is likely to slip below $2: A nice savings for all the folks taking road trips instead of flying.

Oil Prices Collapse on Coronavirus, Saudi Production Plans

Is it too soon to dub today Black Monday for oil markets? Crude prices are crashing on the news that Saudi Arabia plans to cut the price of oil it exports and boost its production after Russia refused to coordinate with OPEC on a production cut. Given the decline in oil demand caused by the coronavirus (more on that below), a production cut would seem appropriate. Instead, Saudi Arabia is openly threatening to flood the market. The result has been one of the worst single-day price drops in history.

As I type, benchmark West Texas Intermediate crude is down about 17% on the day, near $34 per barrel. As recently as early January, WTI traded at $63. Since then, the combination of coronavirus-related travel disruptions and the Saudi-Russia price war has absolutely hammered crude. And it’s entirely possible that the worst is yet to come.

We don’t yet know how much extra production the Saudis will provide, or if Russia will cry uncle and agree to production cuts. So there is certain to be tremendous volatility in prices in coming days. But the economic fundamentals for the oil market look bleak. The International Energy Agency is now projecting a drop in worldwide oil consumption this year, something that hasn’t happened since the dark days of the Great Recession in 2009. That forecast, issued today, marks a sharp turnaround from just one month ago, when the IEA was predicting a modest increase in global demand.

I’ll be back soon with additional analysis and forecasts on this fast-moving situation. But I’ll repeat what I wrote a week ago, when WTI was rallying on talk of an OPEC production cut and an anticipated move by the Federal Reserve to slash interest rates: “I think it’s too soon to sound the all-clear for the oil market.” (At the time, my warning that prices could drop to $40 seemed grim. Now it sounds almost quaint.)

WTI fell as low as $26 per barrel in 2016 because of an earlier supply glut. And back then, there was no global pandemic hampering travel. So a price in the mid-$20s now doesn’t strike me as far-fetched. Even if things don’t get that bad, the oil industry is in for serious pain. And drivers can expect gasoline prices, which were already declining, to drop sharply in the next few days.


Can Oil Keep Rallying After Last Week’s Plunge?

Is the worst over for the oil market? Last week, crude oil prices plummeted in tandem with the stock market on fears of the spreading coronavirus outbreak. After trading near $53 per barrel in mid-February, benchmark West Texas Intermediate dropped as low as $43 last week as virus cases multiplied around the world. Talk of travel bans, canceled conferences and consumers too scared to fly prompted traders to sell crude futures at seemingly any price. But WTI rebounded at the end of the week and has shot higher to start this week. It recently traded near $47 per barrel on hopes that OPEC and Russia will support prices by significantly cutting their production.

A big production cut would help balance the market. And the Federal Reserve’s decision today to cut its benchmark interest rate by half a percentage point could also buoy oil prices. Meanwhile, civil war in Libya is crimping that country’s exports, and energy companies are drilling fewer new wells in the U.S.

But despite all those developments, I think it’s too soon to sound the all-clear for the oil market. After talking with economists and commodities analysts in recent days, the impression I’ve gotten is that no one knows how much of an economic impact the coronavirus is going to have. China’s oil-guzzling economy has clearly taken a huge hit, but the damage outside of China is still an unknown. Cases are popping up in the U.S., but it’s not yet a full-blown epidemic.

Beyond the actual public health impact, we also don’t yet know how severe the public’s psychological reaction may be. Will workers stay home from their jobs if an outbreak occurs in their city? Will consumers shy away from malls and restaurants if they fear getting infected?

Maybe all of this will blow over soon. Maybe any coronavirus cases in the U.S. will end up no worse than the typical seasonal flu. Maybe consumers and companies will mostly go about their business as usual.

But you have to be a pretty staunch optimist to invest according to that scenario. Financial markets were clearly unprepared for the widening scale of the virus, which lead to last week’s dizzying drop when it became apparent that coronavirus would not be confined to China. Now, economists are cutting their forecasts for global economic growth this year. (My colleagues at The Kiplinger Letter think that global GDP growth could be cut in half and that a worst-case virus scenario could tip the U.S. economy into recession.) Weaker economic activity means weaker global demand for oil, and historically, OPEC has not always been able to agree on big oil output cuts to balance drops in demand.

One market forecaster I check in with regularly, Stephen Schork of the energy investing newsletter The Schork Report, mentioned $41 per barrel as a likely floor for oil prices if the coronavirus threat worsens. That would represent more than a 10% drop from where prices are right now.

I expect significant volatility to dominate the market in the coming days, with plenty of sharp moves up and down depending on the headlines of the day. It’s easy to imagine WTI rallying back to $50, or sinking close to $40.

For consumers, the upshot of all this turbulence will probably be cheaper gas prices, at least in the short term. The national average price of regular unleaded is down to $2.42 per gallon, according to travel website AAA. A week ago it was $2.47. Given that it it’ll take a few more days for last week’s plunge in oil prices to filter through to the retail level, I expect gas prices to dip at least a few more cents in coming days. Diesel prices are down too as global freight shipping suffers.

So wait a bit to fill up your gas tank if you can. And be cautious if you’re eyeing any oil-related stocks to buy.

What To Make of Tesla’s Rise and Big Oil’s Woes

Tesla’s stock price has been soaring. Its market capitalization now exceeds that of Ford and GM combined. Meanwhile, the shares of virtually every oil and gas producer are down sharply to start the year. Shares of ExxonMobil, once the world’s biggest publicly traded company, hover near a 10-year low. What’s going on? Are electric cars about to take over the auto industry and banish the need for oil?

The short answer: No. The slightly longer answer: It’s complicated, but still no.

The reason for Tesla’s meteoric share price increase this year is hotly debated among financial analysts. Some attribute it to Tesla’s production ramp-up that points to a profitable future for a company that, to date, has never turned an annual profit. Others point to short covering, in which investors who had bet that Tesla’s stock would fall are now scrambling to close out those bets by buying shares. I don’t claim to know more than the folks on Wall Street do. I’m more interested in the larger market forces that will rule the fate of Tesla and its rivals.

There’s no question that the market for electric vehicles is growing, as I wrote last fall. And Tesla specifically is growing its sales. In 2019, it delivered 367,000 cars worldwide, a 50% jump from the year before. It opened a plant in China in record time, and aims to build another in Germany to serve the European market.

That’s all well and good, but does it justify the stock price rising from less than $200 last summer to nearly $800 today? Remember, this is a company that lost $862 million last year.

To believe that Tesla’s share price is justified and destined to keep rising, as many Tesla bulls do, you need to believe that electric vehicles are going to rapidly gain market share, and that Tesla is going to dominate that market. There are reasons to question both of those assumptions.

First, EVs aren’t exactly threatening to displace the internal combustion engine just yet. Website InsideEVs reports that in 2019, U.S. sales of all plug-in vehicles (not just Teslas, and including plug-in hybrids that still use gas) came in a bit under 330,000, versus total U.S. auto sales of about 17 million. That was actually down from 2018’s sales figure for plug-ins. It appears that EVs are still a tough sell for the typical American car buyer, especially when gas is relatively cheap.

Second, it’s not like Tesla’s competitors are standing still. Both legacy automakers such as Ford and GM, and startups such as Rivian, are readying new EVs of their own. Notably, all of those companies are planning electric SUVs or pickup trucks, the most popular – and lucrative – segments of the U.S. market. Meanwhile, Porsche has unveiled an electric sedan that has drawn rave reviews for its sporty performance. It’s pricier than the comparable Model S from Tesla, but in a recent comparison, the editors of Car and Driver magazine found the Porsche more entertaining to drive.

My take: Tesla’s recent successes are real, but it’s premature to declare it the unquestioned king of the EV market, or even to assume that EVs are destined to displace conventional gas-powered vehicles anytime soon.

Oil: The New Tobacco?

What about the companies that depend heavily on the continued success of the internal combustion engine? The stocks of oil companies are off to a miserable start this year, and have lagged behind the broader market for roughly a decade. CNBC commentator Jim Cramer last week declared that oil stocks are in the “death knell phase” and compared them with tobacco companies. He said that money managers are getting out of the sector in response to pressure from environmental activists, which makes the stocks too dangerous to recommend.

He’s certainly right about the pressure on money managers to divest from fossil fuel investments. But is the comparison of smoking to burning fossil fuels apt?

The number of smokers in the U.S. has plunged over the past half century or so. Cigarettes are highly addictive, but they’re not strictly speaking necessary, as proven by the number of people who have quit. Meanwhile, it’s pretty tough to “quit” fossil fuels such as oil and natural gas. For most people, that would mean giving up heating their home in the winter; traveling beyond the range of a bicycle trip; or buying anything made or shipped with petroleum (which is pretty much everything). The vast majority of cars on the road, and pretty much every truck, train, plane or ship, runs on some form of petroleum (with some corn-based ethanol mixed in to the gasoline). Tesla could sell 10 times as many electric cars this year as it did last year, and oil demand wouldn’t fall much. (In the U.S., natural gas demand would actually rise to generate the additional electricity needed to charge them.)

There’s something to Cramer’s thesis, but again, I think the point is a bit overblown. Electric cars aren’t ready to displace the hundreds of millions of gas-powered cars on the road globally, and batteries are nowhere near ready to power planes or freight trains or other heavy-duty vehicles. In the long term, renewable energy and EVs are certain to proliferate, but the world’s also going to consume huge quantities of oil and gas for a long time to come.

I’m certainly not saying to sell Tesla or buy oil stocks. Just keep in mind that the narrative the stock market is telling about these companies may have gotten a little bit ahead of the reality.

Oil Sinks on Mounting Coronavirus Fears

The Chinese coronavirus isn’t just a public health crisis. It’s also a major threat to commodities markets, given that China is the world’s biggest consumer of most industrial materials. That’s especially true for oil, the price of which is sinking fast as fears of a possible pandemic mount.

At this point, it’s too soon to say just how serious the current outbreak will turn out to be. And thus, it’s too soon to know exactly how much it will affect global oil markets. But traders are clearly nervous. Benchmark West Texas Intermediate crude has fallen from about $58 per barrel last week to $53 now, as it became clearer that the mystery virus has spread faster than Chinese officials had previously admitted.

It’s not hard to see why oil prices are tanking. China is the world’s largest importer of crude and refined products. Its massive economy consumes about 14 million barrels of petroleum per day, according to the International Energy Agency. That puts China second only to the U.S., at roughly 20 million barrels per day. (And unlike China, the U.S. can largely meet its needs from domestic supply thanks to the fracking revolution.) What’s more, China is a major source of new demand in the global oil market. Last month, the IEA noted that developing economies are now driving global demand higher as mature economies start to burn less petroleum. China is at the forefront of that trend.

Bans on travel already cover more than 50 million people in China. If those restrictions spread, the hit to oil demand will get even worse. Meanwhile, there’s the risk that international air travel could suffer as more cases pop up outside China and other countries seek to keep out infected travelers. As of 2017, global jet fuel consumption accounted for nearly 7% of total oil demand, according to the Department of Energy.

Presumably, China isn’t going to shut down all internal travel. And international air travel isn’t coming to a complete halt. But any long-lasting drop in these sources of demand would likely be enough to measurably lower oil prices.

Not nearly enough is known at this point to forecast how prices will respond to the virus. But I think a few different scenarios can be sketched out. If authorities in China and elsewhere can get the disease under control quickly, the impact on oil demand should be modest and prices should rebound to their previous levels fairly quickly. If the number of infections and deaths continue to grow rapidly, demand figures to suffer badly, and WTI could sink below $50 per barrel. That would mean even more pain for energy companies already reeling from rock-bottom natural gas prices. A scenario somewhere in the middle, with infections spreading but not fast enough to trigger major travel and shipping shutdowns, would likely keep oil prices somewhat depressed. In that scenario, I would look for WTI to trade somewhere near $55 per barrel until the crisis passes.

In the longer term, I expect oil prices to gradually head higher. OPEC continues to limit its production, and there are rumors that the cartel will institute steeper cuts if Chinese oil demand shrinks significantly. Fighting in Libya has crimped that country’s production. Energy companies in the U.S. are cutting back on drilling new wells. And the recent armistice in the U.S.-China trade war should give the global economy a modest boost. All of those factors point to lower supply or stronger demand, which in turn should support prices. But until the specter of the coronavirus is removed, none of those factors is likely to matter.

Natural Gas: How Low Can It Go?

The price of natural gas has slumped to a four-year low. And it shows little sign of recovering anytime soon.

How cheap are we talking? Gas futures recently traded at $1.90 per million British thermal units, versus about $3 per MMBtu at this time last year. Prior to the ramp up in domestic production unleashed by hydraulic fracturing, gas routinely traded above $5 or even $10 per MMBtu. (And that’s not accounting for inflation.)

U.S. gas consumption is higher than ever, thanks to strong demand from gas-burning power plants as utilities shut down coal-fired plants. And energy companies are exporting a record amount of the stuff, both via pipelines to Mexico and in liquefied form to buyers all over the world. Yet all that demand hasn’t been enough to prevent an epic price rout, because gas production has grown even faster.

Why do energy companies keep producing more gas when its price keeps dropping? In many cases, they can’t help it. A sizable portion of America’s gas output is the byproduct of oil wells in places like the Permian Basin of Texas and New Mexico. Gas that comes up with the oil is routinely sold off for cheap, if not simply burned off at the well site. And although oil drilling activity has declined lately because of cheaper crude, it’s still going fairly strong.

Much of the recent gas price decline owes to unseasonably warm weather across large swaths of the U.S., which has kept heating demand lower than normal. Stockpiles of gas in underground storage are high for this time of year, and weather forecasts aren’t showing any severe cold outbreaks powerful enough to put a dent in those supplies. Spring isn’t far away, which means the current glut could grow even worse if the current warm trend doesn’t end soon. Plus winter is proving relatively mild in other big gas markets, such as Europe and Asia. So international benchmark prices for liquefied natural gas are also falling. Hence the U.S. price sell-off, say analysts at S&P Global Platts.

All of this is bad news for gas producers, from the diversified oil and gas “majors” such as ExxonMobil and Chevron, to more gas-focused companies, such as Antero Resources and EQT. Exxon, in its third-quarter earnings call, noted that “natural gas prices…remained challenged by market imbalances.” That’s putting it mildly. No wonder that the shares of energy companies have lagged so badly behind most of the rest of the stock market lately.

Of course, gas producers’ pain is consumers’ gain. But it depends on which consumers you’re talking about. According to data from the Department of Energy, commercial and industrial customers mostly paid less for gas in 2019 than they did during the comparable periods of 2018. (The DOE hasn’t tabulated full-year price data yet.) Ditto for electric utilities, even as gas-fired power plants continue to displace coal plants. But residential customers haven’t been benefiting yet. Through the first 10 months of 2019, the average residential price was a tad higher than it was a year earlier.

Natural gas prices are notoriously volatile in the short term. In the long term, it seems reasonable to believe that rising domestic consumption plus growing exports should bring demand into better balance with supply, giving prices a boost. But investors looking for a sustained price rebound are probably in for a long wait.

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.