Q&A of the Day – Could the Iran War Lead to Lower Gas Prices?
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Today’s entry: Hey Brian, here's another gas price question for you. Short term the concern is about higher gas prices. But could we see lower gas prices than we had before coming out of the war? I recall you performing an analysis about how much more oil could be pumped out of Venezuela once their infrastructure is rebuilt. What does Iran look like? Could there be increased production in Iran as well?
Bottom Line: It’s a good question, and a little optimism to end the week sounds nice after the daily increases in gas prices we’ve seen since the onset of the Iran war. I’ll start with a reminder about what the outlook in Venezuela now is.
At the time of the removal of Maduro, Venezuela's monthly oil output was about 900,000 barrels. Here’s the outlook:
- Short-term (within 2 years): Analysts estimate 1.4 million bpd is rather easily achievable with up to 2 million bpd in optimistic scenarios, by quickly ramping up existing operations – mainly by Chevron which is the lone U.S. company exporting Venezuelan oil
- Medium-term (up to five years): Restoring previous (90’s) production levels of about 3 million bpd
- Long-term (over five years): Up to 4 million bpd, exceeding previous peak production in the 90’s
My gas price analysis related to Venezuela was this... If all other factors were equal to what we see in the marketplace today...if Venezuela were producing at what’s known to be able to be achieved, gas prices, for example, would decrease by approximately 20% from current levels based on what are known as elasticity models. Based on current usage/demand and prices – it could bring annualized savings of over $400 per household in today’s dollars. On that note let’s look at the view of the possible in Iran.
Iran’s oil production history and potential outlook is a different version of a similar thing to Venezuela's story. Prior to the Iranian Revolution in 1979, the country reached peak production of approximately 6 million barrels per day. Overtime production has slowly but steadily declined to as low as 1.3 million barrels per day.
Prior to the onset of the Iran war last weekend production had been pacing about 3.3 million barrels per day. Sanctions, underinvestment, aging fields, and maintenance issues have led to the reduction in production over the past 47 years. So, what’s the view of the possible?
- Short-term (within 2 years): Analysts estimate 4 million bpd is easily achievable with relatively minor investments
- Medium-term (up to five years): Analysts estimate 5 million bpd with increased infrastructure and investment totaling into the billions
- Long-term (over five years): 5.5 to 6 million bpd, nearing peak levels reached in the 70’s.
So, in addressing today’s question about what the outcome for oil and gas prices could be on the other side of the current conflict...there are a lot of if’s attached to this. Namely that there’s a stable non-terror sponsoring regime coming out of the other side of this that would lead to the end of sanctions and that would allow for investment into the country’s oil infrastructure... Nevertheless, if all of that came together based on market conditions preceding the current conflict, you’d be looking at a short-term impact of about 15 cents per gallon, medium term impacts of about 25 cents per gallon and long-term impacts of 45+ cents per gallon.
While the dynamics in play are somewhat similar in the Venezuelan and Iranian conversations, what’s different is the quality of the product. Iran’s crude is of higher quality that requires less refining to turn into performance petroleum products. For that reason, there’s more benefit that can be derived by increasing oil production in Iran as compared to Venezuela – which sits on the world’s largest oil supply.
President Trump recently said oil and gas prices would “plummet” once the conflict is over. He’s likely right, not just because tankers would be able to ship through the Strait of Hormuz again, but also because the potential to move the needle on production somewhat meaningfully may be there. It’s not a stretch to suggest that if Iran and Venezuela were producing near their capabilities, we could see gas regularly near $2 per gallon.
Something worth watching in all of this...what happens near the end of this conflict. Something on my radar is what the Iran Revolutionary Guard is doing regarding the industry. For example, if they’re on the brink of elimination, would they potentially move to destroy existing oil infrastructure? That’s worth watching and no doubt is something the Trump administration is mindful of as well.