War in Israel in 1973, and unrest in Iran in 1979, led to a collapse of the oil market during these two periods, which weakened Western economies and led to a wave of inflation that brought down a US president.
In the decades that followed, the possibility of a new conflict in the Middle East would lead to another spike in oil and gasoline prices, leading to the toppling of the US administration.
But recently, less than a week after Iran launched its first direct military attack on Israel, fears suddenly seemed overblown. The Iranian embassy in Damascus led to the outbreak of conflict.
The lull in crude oil prices in the face of this turmoil is due to events 7,000 miles away in the shale oil fields of North Dakota and West Texas, where drillers are leaving global markets for U.S. oil.
“Shale oil has redrawn the map of global oil in a way that most people don't understand,” said Daniel Yergen, vice president of S&P Global and a Pulitzer Prize-winning energy historian, “and need, but it's changed the geopolitical balance and the psychological balance.” The numbers are stark: Two decades ago, the U.S. Producing about 7 million barrels of oil per day and consuming 21 million barrels, the oil-sending Gulf countries are important foreign suppliers to the United States.
Right now, the United States produces approximately 20 million barrels of oil per day, about the same as it consumes.
Imports fell significantly, and the US became a net oil exporter for the first time in 2019. The Permian Basin in Texas and New Mexico pumps out large amounts of shale oil. Analysts say the strategic benefits are significant, even for the White House, which wants to transition away from fossil fuels to clean energy.
The shale oil production boom has cushioned the impact of OPEC's output cuts over the past two years, allowing President Joe Biden's administration to impose sanctions on suppliers such as Venezuela and Russia, while tightening restrictions on Iran, without fear of higher oil prices.
“It's a big change from where we were in the 1970s,” said Harold Hamm, chairman of Continental Resources and a shale pioneer, in a more volatile environment.
After the Russian-Ukrainian war broke out in 2022, an increased supply of shale oil helped keep factories running in Europe thanks to U.S. exports of liquefied natural gas, which the Trump administration previously called “particles of American freedom.” Russian gas supply through pipelines.
Yergin said the extent of shale oil's importance to oil markets was already evident in 2019 after a drone attack on the Abqaiq crude oil refinery in Saudi Arabia, the hub of Saudi Arabia's oil industry.
Crude oil prices rose sharply, then quickly fell at the same pace. “I think that's when it became clear to me that there was a major overhaul going on,” Yergen said.
Still, experts warn that the U.S. could be vulnerable to oil shocks — for example, an all-out war between Israel and Iran, or a significant new decline in exports, for example if the Strait of Hormuz closes — that could take oil away. Gasoline prices from Beijing to Boston are distributed from a homogeneous global market.
“We're still very vulnerable to geopolitics and market manipulation,” said Jim Crane of the Baker Institute at Rice University “and shale oil production doesn't really solve that problem.”
He added: “Yes, we are a big producer, but more importantly, we are big consumers, which is our weak point.” The United States represents 20% of global oil demand, due to its dependence on large cars that consume large amounts of fuel. Shale oil is uniquely vulnerable to price fluctuations, making it an unreliable component of the global oil market, some analysts say.
Four years ago, the collapse of oil prices during the coronavirus pandemic pushed many shale oil producers to the brink of bankruptcy. At the time, President Donald Trump was forced to appeal to major producers to cut production to prevent the collapse of the shale oil patch, illustrating the fragility of US energy.
Shale oil industry executives doubt the ability of drilling companies to ramp up supply fast enough to save the global economy from a sudden oil shock. Wall Street has been reluctant to finance new drilling campaigns by producers that have gained a reputation for waste in recent years. The Biden administration was aware of this dynamic, as well as the political consequences of rising gasoline prices before the election.
Last year, a senior Biden adviser said the U.S. was out of step with Wall Street drilling firms. The White House is focusing its diplomacy on preventing further turmoil in the Middle East.
“We have an election and the Biden administration cannot afford to act recklessly or impulsively,” said Matt Gertkin, geopolitical strategist at BCA Research.
