Oil prices surpassed $100 a barrel last week. NPR’s Ayesha Rascoe speaks to Bob McNally, founder of the research firm Rapidan Energy Group, about how the Iran war is disrupting oil supplies.
Transcript
AYESHA RASCOE, HOST:
As we just heard, the conflict in the Middle East has led to another spike in oil prices. We saw oil prices peak last week, and national gasoline prices again climbed above $4 a gallon. Joining us now to discuss how this could affect the U.S. economy is Bob McNally. He’s the founder of the research firm Rapidan Energy Group and was previously an energy adviser in the George W. Bush administration. Thank you for being here.
BOB MCNALLY: Ayesha, good morning, and thanks for having me.
RASCOE: So have you been surprised by how the oil markets have reacted to the Iran war over the past few months?
MCNALLY: Yes, I have. The crude oil markets, right?
RASCOE: Yes.
MCNALLY: Going into our Independence Day holiday, crude oil prices had unwound all of the risk premium that had been placed in after the war started. Crude oil markets were priced for perfection and exhibited a sort of a fundamental optimism that this thing is over. And I always thought that was wrong. The market is sort of prematurely optimistic. I think, instead, we are in a structurally escalation-prone dynamic, and I thought that was unwarranted.
So you may ask, well, then why? Why did oil prices fall? Two big things – one, this entrenched optimism among traders. And that’s a big deal because prices reflect how traders think about the future. And they’ve been very optimistic, believing President Trump that this is going to end soon. And No. 2, to put it in one way, China, which is a huge importer – it sort of went on a crash diet. It cut its imports of oil in half. And that alone took a lot of pressure off of crude oil prices. So those are the two big surprises.
RASCOE: Well, do you think that now is different because prices have spiked again? Will this time be different? Is that optimism still there?
MCNALLY: The optimism’s still there, but China is starting to come off its diet, if you will. And we also released strategic stocks. So a lot of the buffers and a lot of the help we had in the first four or five months to keep oil prices contained are starting to end. And as I said, you know, the United States and Iran and Israel are locked in a structurally prone escalation dynamic. And we – as you noted, the president called off a couple nights of strikes, and there’s discussions about a new ceasefire. But I think the trend here, unfortunately, is toward conflict and more disruption. And the market was just way too optimistic around Labor – around Independence Day.
RASCOE: Well, what kind of capacity does the U.S. and other countries have to deal with any shortages? I mean, as you said, strategic stockpiles were already kind of tapped. What type of capacity do we have to deal with shortages?
MCNALLY: Yeah. Well, first of all, we can step back and give ourselves a bipartisan pat on the back for having allowed the shale oil revolution to proceed. So the United States has been a huge safety valve here – our record crude production and exports, and we’re sending refined products around the world. So the U.S. shale revolution has – without it, we would’ve been in a much worse scenario.
But to your point, the strategic stocks are down to 1983 levels. We’re almost done with those releases. Our refineries are already producing all they can. We’re exporting just about all we can. So we are out of slack. There’s no slack in the system, including in the U.S., which is going gangbusters. But this Hormuz problem, this disruption – the largest in history – is just too big of a problem for the United States to solve, you know, over the long term.
RASCOE: Well, what does that mean for American consumers, then?
MCNALLY: Well, this is where you’re not going to be happy, and they’re not going to be happy with what I have to say. Unfortunately, even though the U.S. is the world’s biggest oil producer, our consumers face the global oil price, and that price depends on global oil supply and demand. So a disruption anywhere leads to a price spike everywhere, including here. And I’m afraid to say, here we are at $4.10 gasoline, well over $5 on distillate. I’m afraid crude oil prices are headed higher, and with that, will the prices for – you know, we see at the pump and so forth. So I’m afraid as long as this conflict goes on, the trend is going to be up for prices.
RASCOE: Are you expecting to see record levels for gasoline prices?
MCNALLY: I would not rule that out. That is not my base case right now, but that is certainly coming into play ’cause here’s the deal. Again, as I said, over the last four months, we’ve had these inventories that we drew down, and we had China going on a crash diet. Going forward, the price mechanism will have to do more of the balancing if we can’t get those flows from Hormuz resuming. So, yes, entirely possible, Ayesha. Not my base case, but we’re certainly headed in that direction.
RASCOE: That’s Bob McNally from Rapidan Energy Group. Thank you so much for joining us.
MCNALLY: Thank you.
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