Analysis by Energy Workforce President Tim Tarpley
Over the weekend, Vice President Vance traveled to Pakistan to meet with a high-level Iranian delegation to seek an off-ramp and a long-term deal for the current crisis with Iran. After a lengthy discussion, the Vice President left without a deal. Reports vary, but the main sticking point appears to have been over the resumption of the Iranian nuclear enrichment program, with the US delegation pushing for a 20-year pause and the Iranian delegation pushing for a shorter pause of 5 years. As of writing, talks have not resumed; however, the President has indicated that he believes the Iranians still want a deal and would like to come to the table.
The talks have so far been unsuccessful. The US announced that the US Navy would begin its own blockade of the strait and prevent any ships that the Iranians permitted through from passing. This new blockade has been in place since Monday, and ship traffic has significantly slowed, with only a handful of ships passing through. There are indications that Iran will accept the blockade, and so far, it has appeared unwilling to test it with its own ships.
What does all this mean for OFS? First of all, it’s an open question whether an elevated oil price of around $100 will ultimately lead to demand destruction. IEA has predicted that demand may drop by 80,000 barrels a day, with a 1.5 million-barrel-a-day reduction in Q2, should the disruptions continue. However, such predictions depend on how long the conflict lasts and how quickly infrastructure can be repaired should hostilities cease.
A big question for many EWTC companies is whether we will see a long, sustained uptick in domestic production to offset disruptions in the Middle East? While the jury is still out on this question to some extent, we are starting to see signs that the answer is yes. We are seeing planned drill-outs after fracs, which are absorbing spare capacity. Continental Resources had been planning to drop its Bakken play in January; now it’s back on. Rigs planned to lay down are often extended. This crunch could lead to higher prices that service companies can charge, as they are dealing with the triple whammy of the crunch, higher fuel prices, and tariff increases on their supply chains.
What is the ultimate off-ramp for the Iran crisis? It’s hard to say how this all ends, but there are a few things we do know for now. First, the White House does not appear to have the appetite or ultimately the political support to continue a long- protracted conflict with Iran. For this reason, a deal certainly may be reached that leaves the Iranian regime intact to some extent. The Iranians seem to think they have enough cards to keep playing their hand at this point, despite having lost almost their entire Navy and Air Force, and a large part of their senior leadership. However, with the White House unlikely to use ground troops to attempt to end the current regime, the reality on the ground is that the regime will likely survive. There also does not appear to be an active resistance effort within Iran that could displace the regime from inside. Given these facts, we can expect that a fragile peace may be the best offramp we can strive for with the hope that whatever survives of the regime may be more willing to work with the rest of the world and be somewhat less dangerous and disruptive than its prior iteration.
Tim Tarpley, Energy Workforce President, analyzes federal policy for the Energy Workforce & Technology Council. Click here to subscribe to the Energy Workforce newsletter, which highlights sector-specific issues, best practices, activities and more.
