(Bloomberg View) — It is a time of crisis, or at least near-crisis, in the Persian Gulf. An alliance led by Saudi Arabia has cut ties with and blockaded neighbor Qatar, in part for being too friendly with Iran. Terrorists have struck in Tehran, and Iran’s Revolutionary Guard Corps blamed the Saudis. The longtime protector/hegemon of the region, the U.S., has been giving conflicting signals, its leadership preoccupied with other matters back home.
You might think oil markets would be freaking out about all this. They’re not. Oil prices are down about 4 percent since the Qatar news broke early Monday.
Explaining the short-term moves of the oil market (or the stock market, or the bond market) is generally a pointless endeavor. In this case, a U.S. Energy Information Agency report showing higher-than-expected inventories of gasoline and oil has gotten most of the credit/blame for the price drop.
But the fact that markets haven’t freaked out about the tensions in the Gulf fits well with a longer-run narrative: that the U.S. shale oil industry has supplanted Saudi Arabia as the key swing producer in the oil market. That is, it’s producers in Texas and a few other states that are setting oil prices with their decisions to stop or start drilling, not Organization of Petroleum Exporting Countries oil ministers with their decisions to raise or lower production quotas. And lately, U.S. producers have been doing a lot of drilling.
They’re not the only ones, actually.
Four of the top five oil-producing countries have made big production increases over the past few years, even as global economic growth (and thus oil demand) has disappointed. Lately the top two, Russia and Saudi Arabia, have been cutting production in an effort to boost prices. U.S. drillers certainly wouldn’t mind higher prices, but their break-even point keeps falling because of technological advances and efficiency gains. If they can make a profit, they’ll drill — and oil markets seem to have increasingly come to expect that they will compensate for any cuts in supply from elsewhere. So they yawn at a crisis in the Persian Gulf.
It’s an understandable enough response. But it should probably make us all a little uneasy. Whenever everybody in the oil business agrees that the world works one way, it tends to start working differently. Production increases from the U.S. may have been enough to make up for cutbacks by Saudi Arabia, but the U.S. is in no position to take over Saudi Arabia’s overall role in the world oil market.
The U.S. produces a lot of oil these days, but it still consumes more than twice that amount — and most of the world’s other major economies are even more dependent on oil imports. Bloomberg Gadfly’s Liam Denning had a wonderfully disconcerting column last week on the role that the U.S. Navy has played since World War II in making the global oil market possible. If American politicians decide to stop underwriting that extremely useful service, strange things could start happening. They may even be happening now.
Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”