The crude oil market has a blunt message for the world.
U.S. sanctions on Iran will bite hard and so remove a chunk of crude oil supply from the global market. That’s why prices for this energy have rallied so much lately.
The price for light sweet crude has rallied almost 10 percent over the past few weeks to $73.63 a barrel recently from $67.25 at the beginning of May, according to data from Bloomberg.
In early May the Trump administration signaled an end to U.S. participation in the so-called Iran nuclear deal and would, therefore, begin to impose sanctions on the country. The Obama-era agreement had allowed Iran to trade oil and other goods in exchange for not developing nuclear weapons.
“I think higher oil prices are a sign that the market is coming to grips with the fact that Trump is serious about oil sanctions on Iran,” says Joe McMonigle, senior energy policy analyst at investment research firm Hedgeye Risk Management and former chief of staff at the Department of Energy.
McMonigle also says that recent efforts by the European Union to try to salvage the deal may have confused oil dealers. The price of crude did dip to $65 in late May before reversing all of the losses and then gaining some more.
But now in early July, it is clear from Trump’s tweets and State Department statements that the administration means business, McMonigle says.
He isn’t the only one.
“Our analysis reflects an assumption that the Trump administration is fully committed to squeezing Iran as quickly and as rigidly as possible, so it will be willing to stomach some uptick in oil prices to achieve this end,” states a recent report from geopolitical consulting firm Eurasia Group.
At least part of making the sanctions work is getting the major oil companies to refrain from becoming sanctions-busters by purchasing Iranian crude oil. Remember that in major capitalist economies governments don’t typically import oil, but private companies do. Those corporations will no doubt be loath to incur the ire of the U.S., which still remains the most important market in the world.
As a result of all the sanctions squeezing, around one million barrels a day of Iranian crude oil will be taken off the world oil market, according to Hedgeye. That only adds to a problem of dwindling supply across the globe.
Oil production from economic-basket-case Venezuela is declining steadily. This is despite the fact that the country holds the largest reserves of oil of any country in the world. Already the state-owned oil firm PDVSA is now so badly run that its oil output is falling through lack of working equipment and poor managers. The country now produces 1.5 million barrels of oil a day, down from around 2.9 million in early 2014, according to data from TradingEconomics.com.
Of course, the sanctions on Iran are having the effect of keeping oil prices high, which has a knock-on effect on pushing up fuel prices. The wholesale cost of a gallon of gasoline has climbed more than 40 percent in the 12 months through Monday. That doesn’t include any taxes.
The jump in prices could be a problem for the Trump administration in the voting booth. Remember, it is something of a given in U.S. politics that people vote with their pocketbook. A sustained increase in fuel costs tends to act as a form of tax on consumers.
Worse still, Americans get an unfriendly reminder of the rising price of fuel each time they fill up at the tank at the gas station. Despite the booming U.S. economy, that factor could be influential in the forthcoming elections, just a few weeks away.
“Oil prices will be the key variable that might change the administration’s calculus, [on sanctions] especially if gasoline prices become a more salient midterm issue,” states the Eurasia Group report.