Israel’s escalating confrontation with the neighboring oil-rich Iran poses the question of the conflict’s possible effects on the West Texas energy industry.
Israel’s year-long retaliation against the Iran-sponsored terrorist groups Hamas and Hezbollah for the Oct. 7, 2023, attacks and hostage-taking in Israel prompted Iran’s recent missile attack and experts say the situation gets more complex by the day.
Odessa oilman Kirk Edwards, State Rep. Brooks Landgraf and Waco economist Ray Perryman report that the Permian Basin as usual is heavily involved.
“The recent Iranian missile attack on Israel has caused the Middle East to be on high alert, especially when it comes to an inevitable Israeli response,” Edwards said Tuesday. “First, this feud has been brewing for quite some time.
“Iran has been able to get away with using ‘proxy’ armies to attack Israel, but once the layers have been peeled back, everyone in the Middle East and world knows Iran has been the instigator of all this terror and will continue to do so until stopped.”
On the other hand, he said, Israel will not sit back and do nothing as can be seen from the now one-year anniversary of the slaughter of the Israeli people.
“Israel will respond in some fashion ahead,” Edwards said. “The most strategic response would be for Israel to hit Iran’s oil-loading facilities which would knock out some 1.5 million barrels of oil per day that is feeding the money train to the Iranian proxies to fund their attacks on Israel.
“Secondary targets will be the nuclear enrichment facilities that Iran is using to upgrade their uranium levels to become a weapons grade enrichment. Again, Israel will respond in some way and soon.”
Oddly, he said, the Biden administration is selfishly telling the Israelis not to hit oil or nuclear targets because oil prices might rise as a result before the November election.
“It is very sad to see the United States take that position and not allow Israel to make its own defensive decisions,” Edwards said. “Interestingly, Saudi Arabia can and will easily make up for the barrels that are lost from Iran as they have a tremendous amount of oil shut in right now trying to balance the world’s oil appetite.
“They will be a good buffer from a high price shock ahead. There is no scarcity of oil on the world stage right now. This will truly be an interesting next few weeks ahead in our world oil industry.”
Landgraf said the best outcome would be for Iran to halt its aggression against Israel both directly and through affiliated terrorist groups.
“There is always a risk that the global oil supply can be disrupted when conflict escalates in that volatile region,” the Odessa Republican said. “That said, commodity price increases have already been factored in as markets have understandably anticipated Israel’s need to defend itself.
“As always energy producers right here in the Permian Basin are best equipped to ramp up production if necessary. In doing so, we can not only help stabilize prices and boost West Texas industry but also reinforce America’s role as a dominant energy exporter.”
Landgraf said the good news is that as a nation the U.S. is now better equipped to handle these global energy disruptions, but it must ensure that domestic energy production isn’t hampered by misguided policies from Washington.
“If we empower American producers, both our energy sector and consumers will be in a strong position to navigate the challenges ahead,” he said.
Perryman said that if the Middle East conflict escalates to the point where Iran becomes more directly involved, America could see oil prices rise significantly.
“If for example Israel bombs Iran’s oil infrastructure, a significant amount of daily production could potentially leave the market,” Perryman said. “The U.S. Energy Information Administration indicates recent daily production of crude oil in Iran of almost 4 million barrels per day of a world total of 81.1 million barrels per day.
“For context, the U.S. total is 13.2 million barrels per day and the Permian Basin is well over 6 million.”
He said this outcome is highly unlikely as it would do substantial damage to countries throughout the world that are supportive of Israel’s efforts to defend itself from attacks.
“It is more probable that retaliation will focus on energy infrastructure used only inside Iran, military installations or other strategic targets,” Perryman said. “The backlash from a major disruption in oil supply would be severe and counter-productive.
“In the more far-fetched but not impossible scenario, there is the possibility that Iran would respond to the interruptions in its oil production, which is critical to the country’s economy, by attacking Saudi Arabia with its 8.9 million barrels per day or other major producers or shipping lanes.
“The result could be significant price increases and this rapid escalation of the conflict.”
Perryman said it has long been clear that for the United States and its allies, support of the responsible development of domestic oil resources is essential to helping protect against severe price shocks like those that are being contemplated.
“While oil from Iran is sanctioned by western nations, China has been buying about 90 percent of it at reduced prices and will almost certainly continue to do so irrespective of Iran’s actions in Israel and elsewhere,” he said. “Even though this oil is largely off the global trading market, it provides resources to China that would otherwise be procured through more normal channels.
“Thus its removal from the market would impact prices, which is reflected in current prices as the probability of an interruption has moderately escalated.”
In the short term, Perryman said, a potential oil supply shock is thus supporting somewhat higher prices and escalation could lead to further price jumps.
“Over a longer-term horizon the vulnerability confirms the importance of U.S. production in times of geopolitical tension and it should lead to support for common sense efforts to facilitate development of this crucial resource in a responsible manner that is sensitive to climate concerns,” he said. “The natural gas market is likely to be much less affected, though a protracted conflict which significantly slows LNG shipments and the ongoing development of that market could have an effect on natural gas prices.
“In the present environment Iran supplies less than 1 percent of global gas and has no infrastructure to support LNG exports. Thus the gas market is unlikely to be materially impacted other than the much longer-term effect of higher oil prices incentivizing natural gas substitution.”
