What a Middle East oil price shock could mean for US consumers

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More than a million households remained without power in the US south-east as of yesterday evening, after Hurricane Helene devastated the region, killing more than 180 people and making the storm the deadliest since Hurricane Katrina in 2005.

Down in west Texas, former president Donald Trump hosted a private fundraising event in Midland yesterday, where he made a pitch to oil donors for cash as his campaign enters its final stretch.

The world is holding its breath as it awaits Israel’s widely expected retaliation against Iran for its missile barrage on Tuesday. The FT has a breakdown on how the IDF could respond, including attacks on Iran’s missile launchers or oil infrastructure.

Today’s Energy Source breaks down what this rapid escalation in the Middle East could mean for the US oil market, just as the country prepares to cast votes in the presidential election.

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Amanda

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Is the US prepared for a Middle East oil shock?

The prospect of an all-out regional war in the Middle East is higher than ever this week as the world braces for Israel’s response to Iran’s missile attack.

The rapid escalation woke up an oil market that had otherwise been complacent about the Middle East conflict, which has caused no major supply disruptions. Brent crude, the international benchmark, climbed as high as $76.03 before closing at $73.90 yesterday. West Texas Intermediate, the US marker, closed 0.4 per cent higher at $70.10 a barrel.

The fear among traders is that an Israeli retaliation could target oil infrastructure in Iran, an Opec member that exports about 1.7mn barrels of oil a day. An attack could also move the region closer to a worst-case scenario for the oil market where Opec production is compromised and Tehran shuts down the Strait of Hormuz, a crucial chokepoint for crude, sending prices spiralling into the triple digits.

Ben Hoff, global head of commodity strategy at Société Générale, said: “It’s like a game of Jenga, where the question really becomes, once you’re at the seventh or eighth block, which one is it going to be that just ends up being a little bit too much, and the whole thing collapses on itself?”

What does this mean for the US? Harold Hamm, founder of Continental Resources and a donor to Donald Trump’s election campaign, warned the US was “unusually vulnerable” to a Middle East oil shock, blaming the Joe Biden administration policies for leaving the US shale patch in “weakened condition”.

But it’s not the 1970s any more. Thanks to the shale revolution, the US is the largest oil and gas producer, with output sitting at record highs. An oil shock from the Middle East is not going to devastate the US economy in the same way as it did then.

“The US is the most prepared out of any developed [economy] . . . to handle a significant disruption in the Middle East,” said Hunter Kornfeind, an oil market analyst at Rapidan Energy Group.

That’s not to say higher crude prices from market fears or a real disruption to global supplies won’t pinch consumers. 

While the US became a net exporter of petroleum in 2020, it remains a net importer of crude oil that’s often used in refineries, with imports totalling 6.48mn b/d last year, about a quarter of which is from Opec and the Gulf, according to the Energy Information Administration. Higher global market prices for oil will drive up the price of refined products such as petrol and diesel for American consumers.

The US has a “big bridge cushion” of crude inventories to help mediate the effect of any price swings, say analysts. The country has about 383mn barrels (about 50 per cent capacity) left in its strategic petroleum reserve, which was created in the wake of the Arab oil embargo in the early 1970s, in addition to 413mn barrels in commercial crude inventories. The US consumes roughly 20mn barrels of petroleum a day.

The White House began releasing oil from the SPR in 2021 ahead of Moscow’s invasion of Ukraine in an attempt to keep down domestic petrol prices. It released another 180mn barrels of oil from the reserve in 2022 after sanctions on Russia brought fears of supply disruptions.

Trump and his supporters, including Hamm, claim the Biden administration has left the country exposed to an oil shock, with Trump vowing to fill up the SPR “immediately” if elected in November.

Analysts brushed off the concerns. “The SPR is lower than it was pre-Ukraine. But at the same time, it still has enough to offset any kind of supply interruption at least for an immediate period,” Kornfeind said.

Absent a disruption in the Strait of Hormuz, there’s also a lot of spare capacity from Opec sitting on the sidelines. Since late 2022, the oil cartel has artificially cut output, totalling about 5.7 per cent of global crude consumption in an effort to boost prices during weak global demand. In a meeting yesterday, top Opec+ ministers left their oil policy unchanged.

“The market remains bearish on fundamentals for next year and does not believe oil supplies will be at risk despite the escalation,” said Amrita Sen, founder and managing director of Energy Aspects. “Prices may fall back after the initial rally.”

Perhaps the biggest consequences for the US from higher global crude prices is at the ballot box. Escalatory action in the Middle East could drive up gasoline prices, just as Americans go to the polls next month to pick their next president.

Henning Gloystein, practice head of energy, climate and resources at Eurasia Group, said: “If there’s any major oil price spikes, that will be immediately felt at the pump, and that’s what American voters care about more than anything else in terms of daily pricing.”

A rise in petrol prices in the coming weeks was a “bad situation” for the election prospects of Democratic candidate Kamala Harris, he added.

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• Opinion: Alan Beattie explains why the US can’t impose its will over global trade in electric cars.

Energy Source is written and edited by Jamie Smyth, Myles McCormick, Amanda Chu, Tom Wilson and Malcolm Moore, with support from the FT’s global team of reporters. Reach us at energy.source@ft.com and follow us on X at @FTEnergy. Catch up on past editions of the newsletter here.