Back in April, the United Arab Emirates (UAE) announced it would leave the world’s largest oil cartel. As I explained in a previous column, this was a win for American consumers because it signaled the UAE was preparing to pump more oil. Right on cue, they produced a record 4.1 million barrels per day last month, which helped drive down US prices at the pump.
The background here is that the Emirates were part of OPEC for decades. Like all cartels, it seeks to keep prices artificially high by suppressing competition. Member nations coordinate on production, agreeing to keep output at specified levels—always below where they’d be in a free market.
But the outbreak of war with Iran and the subsequent closure of the Strait of Hormuz reshuffled the deck of the oil market. To cope with the unprecedented loss of oil flows out of the Persian Gulf, countries worldwide have been burning through their oil reserves to keep a lid on prices, because oil at $200 a barrel would mean a global recession.
Here in the US, the government has been draining the Strategic Petroleum Reserve at the fastest pace on record while private crude stockpiles are also falling. The oil industry has even been draining infrastructure, like storage tanks at the Cushing, OK facility, to keep refineries supplied.
And many of those refineries have been delaying maintenance while others run at or above 100% capacity, increasing wear on equipment, to replace the lost supply from overseas. US exports of oil and petroleum derivatives like gasoline have set new records amid the conflict to meet the globe’s voracious appetite for fuel.
But all these reserves, both domestic and foreign, will have to be replenished, and the amounts aren’t trivial. It’s already hundreds of millions of barrels—and rising. This is where the UAE’s decision to leave OPEC pays big dividends.
Ordinarily, being in a cartel is profitable because you participate in quasi-monopoly pricing power over a market. But as the Strait of Hormuz reopens and oil begins flowing from the Gulf again (albeit erratically with the on-again-off-again ceasefires), many nations have switched from draining reserves to trying to refill them.
Consequently, demand is already vastly outstripping supply. If the UAE were still in OPEC, the Emirates would have to keep a lid on production, but now they don’t. Instead, it’s a veritable pump-a-palooza as the UAE ships as much oil as possible to buyers like Chiona and US West Coast refineries.
The reason this is so beneficial to American consumers is that more energy production will ultimately mean more supply, which puts downward pressure on prices. Less expensive crude will mean lower prices at the pump in the long run.
So, why aren’t consumers seeing relief immediately if the UAE is already shipping so much oil? It’s because everyone’s reserves are empty.
Oil shipments through the Strait of Hormuz remain tentative at best, and the volume is far below pre-war levels, even though it has increased significantly since no traffic was getting through. Nations and industry alike want their reserves refilled because there’s low confidence that oil flows will remain uninterrupted.
Furthermore, oil exports from the Gulf are not yet at pre-war levels, so global reserves are still falling. This is why the US needs to secure a peace deal as soon as possible so that transit through the Strait can normalize. Once that happens, the higher oil production from nations like the UAE will help satiate the increased demand for crude.
As reserves are refilled and supply chain stress disappears, consumers will see relief at the pump. Of course, lower prices would come sooner if Congress got on board with the drill-baby-drill agenda by passing permitting reform, which would remove the useless bureaucratic red tape that hamstrings domestic production.
America has the reserves to be not just energy-independent but energy-dominant. Until Congress acts, however, consumers will continue to be at the whim of events halfway around the globe, and relief will come slower than it otherwise should.
E.J. Antoni, Ph.D., is chief economist at the Heritage Foundation and a senior fellow at Unleash Prosperity.