A coming oil crunch?

It has been reported that United States President Donald Trump’s policy of preventing Iran from exporting oil to other countries may lead to an oil crunch. With several key Persian Gulf states not expecting to increase production to cover any shortfall, it is possible that a shortage of oil could take effect from any time after 01 May 2019.

So, what is causing the prospect of an oil crunch?

The United States has a hard line against Venezuelan regime of Nicolas Maduro who is resisting calls to step aside. Mr Maduro is widely recognized as having caused the collapse of the Venezuelan economy, which now suffers frequent black outs, critical shortages of just about everything, hyper inflation among other effects. Mr Maduro accuses the United States of trying to topple the government and of being an imperialist state. This is  despite the threat of severe sanctions being implemented. Those sanctions include punitive actions against countries that try to buy Venezuelan oil, in the knowledge that Mr Maduro’s government and military will probably squander any income generated. Sanctions of this nature will take effect on or immediately after 01 May 2019 according to United States National Security Advisor John Bolton.

The United States also has a hard line against the regime of the Islamic Republic of Iran. Officially America is not calling for regime change, but its continuing tightening of sanctions on the Persian nation suggests otherwise. Secretary of State Mike Pompeo says that oil brings in U.S.$50 billion of revenue for Iran each year, which comes in large part from sales to China, South Korea and India and which are under pressure to cease buying Iranian oil.

How will it affect New Zealand?

It is too early yet to tell how the market will manage this. Other countries such as the United States and Russia may increase production to try to offset the shortage of Iranian oil and to stifle any global supply concerns. One suggestion is that Saudi Arabia may increase production to offset the loss of Iranian production, but the Saudi’s have said nothing about doing so. Other countries in the Middle East, such as Iraq and Turkey are less than enthusiastic. Iraq believes that Organization Petroleum Exporting Countries needs to make a group decision, whilst Turkey and Iran have been seeking to improve economic ties. Their non compliance may with U.S. sanctions may cause oil prices to become unsettled.

As for New Zealand, our oil prices are going to increase again. The vast bulk of our petroleum comes from overseas and historical records show that just a small drop can cause chaos. As for our vehicle fleet, its old age – 14.1 years was the average age in 2014 compared to 9.8 for Australia at the same time – and high number of used vehicles being imported mean our petrol and diesel consumption figures are not as good as they could be. Those with inefficient gas consumption will once again be starting to look at hybrids such as the Toyota Camry, Corolla and Prius. More environmentally conscious people wanting to change their cars might be looking at Nissan Leafs and other electric vehicles. Our politicians and commentators will once again debate the merits of a greener outlook, but as soon as prices drop, they will probably forget again.

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