- Trump Administration put their credibility on the line by taking a hard line on Iranian oil exports, pledging to collapse them to zero.
- Iranian officials matched the rhetoric by promising to close the Straits of Hormuz entirely to oil traffic. A third of world’s traded oil production transit through that choke-point.
- Assurances of ramped-up oil production from Saudi Arabia and Opec appear as firm as a wet noodle.
U.S. taking a hard line on Iran oil exports
Over the Easter weekend we’ve seen an escalation of Trump Administration’s rhetoric toward Iran. On Monday, 22 April, State Secretary Pompeo issued an official statement pledging that after their expiry on May 2, the U.S. would not renew any of the waivers enabling Iran to export crude oil. Iran’s oil exports have already dwindled from 2.5 million barrels per day last April to around 1 million barrels, and the official U.S. policy is to bring Iranian oil exports to zero.
In taking the hard line against Iran, the Trump administration has put its credibility on the line. Secretary Pompeo followed up the official announcement on twitter, stating that, “maximum pressure” means maximum pressure. Trump backed him up promising “full sanctions…”
In their turn, Iranian officials have promised that if the U.S. deprives them from selling their oil, they would shut off the Straits of Hormuz, effectively removing all of Persian Gulf oil production from the market. Up to a third of world’s traded oil production transits through the Hormuz Straits. Trump tried to preemptively calm the markets in his 22 April tweet, suggesting that Saudi Arabia and OPEC would more than make up for the loss of Iranian oil exports.
What if Saudis can’t make up Iranian supply shortfall?
Today however, such reassurances ring hollow: the statements from KSA and UAE officials offered wet noodle assurances of, “highest possible care to ensure market stability.” They pledge care… not barrels, not exports, not production. Care.
For years, every time some crisis threatened to disrupt global oil supplies, the markets were reassured that the Kingdom of Saudi Arabia (KSA) could comfortably make up the shortfall. Recall, in the mid-2000s, senior Saudi Aramco and the Saudi Petroleum Ministry officials were quoted claiming that, “we can produce 10 million, 12 million, or 15 million barrels a day for 50 to 100 years. … [To] our 260 billion barrels of proven reserves… we can easily add another 200 billion, and we can still add another 200 billion we have yet to discover.”  This kind of credible bravado enabled the Saudis to jawbone oil prices lower and keep the markets tranquilized. As recently as 2014, Saudi jawboning was key in collapsing the price by over 75% through 2015.
But today, the Saudis aren’t projecting confidence and more and more evidence suggests that their production is well past peak and that they are facing very real challenges in maintaining exports. Just this month we learned that Ghawar, KSA’s largest oil field (half of Saudi exports) was producing fully 2 million barrels per day less than previously believed (3.8 mln bbl/day vs. 5.8 mln/day).
As crisis points multiply, oil supply risks are compounding
The scramble for oil could produce serious further disruptions to production and trade and lead to a new oil price shock. This could be the beginning of the scenario feared by the US, UK, and German military establishments which predicted very dire consequences, including the price rise to $500/bbl. Whatever the reality of the situation, U.S. administration should refrain from triggering new crisis points along the oil supply routes and believe that KSA, Opec, and their own shale resources will be enough to offset any and all disrupttions. Any miscalculations in this regard could prove disastrous.
 Matthew Simmons, “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy”