Iran's role in the global oil supply

The U.S. and Israel's war with Iran has started to ripple through global energy markets. From Marketplace, I'm Sabri Beneshaw, in for David Brancaccio. Three ships have been attacked in the Persian Gulf. A refinery in Saudi Arabia was temporarily shut down after it was attacked by drones. Iran has said it has closed navigation through the Strait of Hormuz, and hundreds of ships are now sitting idle, unwilling or unable to pass through. Brent crude prices are up more than 8.8%. West Texas Intermediate is up 8%. Joining us to talk about it is Fernando Valli. He's Managing Director of Energy for the investment firm Hedgeye Risk Management. Welcome. Thank you. Glad to be here. Oil futures, oil prices are up, supply and demand. What specific developments in this conflict are pushing those prices up right now? I think there are a few aspects here. One, obviously is the disruption, the immediate disruption that you're seeing. There are fewer tankers coming around the bend on the Strait of Hormuz, which is close to 30% of world oil production. That is a combination of both just pausing because of the attacks and not to have any risk. But then there's also the issues of insurance and several insurance companies canceling insurance for ships transiting in the Strait of Hormuz. And that kind of disruption would force the oil market to consider some form of rerouting. There's just not a lot of ways to reroute that much oil within a very short time frame. How big of an oil producer is Iran and where does that oil go? And is that oil not flowing now? The oil is still flowing. There's been no news of an attack on Carver Island, which is their main export hub. It accounts for 80 of exports Iran a fairly large producer close to 4 million barrels a day They export just under 2 million barrels a day which primarily goes to China It's over 80% goes to Chinese refiners. Is China still getting that oil? Is it paying more for it? What does that mean for China? It's certainly going to pay a lot more for oil and natural gas that goes through the Strait of Hormuz. They are the largest importer of oil globally. The U.S., as you may know, produces 13.5 million barrels a day roughly. With Canada, we are close to 18 million barrels a day of production versus our 20 million barrels a day of consumption. So we're fairly evenly balanced, whereas China still imports over 13 million barrels, sometimes as much as 15 million barrels a day of oil. A lot of that comes from the Middle East. Iran can account for over 10% of those volumes. Iran, because of the sanctions, was selling at a much lower price. China is now going to have to find a different supplier, potentially, or at a significantly higher cost than it was paying Iran. So the potential inflation shocks for China could be very significant the longer this lasts. And how about us? How about in the U.S.? I mean, is this something that could trickle down to pump prices? It almost certainly will. We have a more transparent mechanism to move oil prices into pump prices than China would. So it almost certainly will. If, again, the conflict does not escalate from here and Iran doesn't have the strength to retaliate, then it's possible that we'll get prices to come down. also worth mentioning the u.s has a lot of capacity to grow production at these higher prices it doesn have that capacity at 60 oil but at 75 it certainly can and that will alleviate some of the impacts on the pump for American consumers There is a lot of slack in the global oil market in the sense that OPEC could pump more We could pump more. Does that kind of mitigate the medium-term potential consequences of this conflict? Less so for OPEC because most of OPEC's production growth would come through the straighter So it doesn't necessarily help you to produce more in that region specifically. The U.S. does have the capacity to grow production in fairly short order, enough to alleviate combined with strategic petroleum reserves, not just in the U.S., but in China as well. That can help put a cap on short-term oil prices. Fernando Valli is Managing Director of Energy for investment firm Hedgeye Risk Management. Thank you so much. My pleasure. Great to be here with you. Transcription by CastingWords The fighting between the US and Israel and Iran is forcing air carriers to cancel or reroute flights and stranding passengers. The airlines could also face higher fuel costs. And all of that is driving down international airline stocks. Stocks, United is down almost 7% in pre-market trading. Air France down 10% yesterday, another percent today. India inter aviation fell 6 ASEANA down 2 Marketplace Nancy Marshall has more Countries around Iran have closed their airspace forcing airlines to cancel some flights and leave passengers stranded. The website FlightAware says more than a thousand flights were canceled in the past 24 hours just at Dubai International Airport, with the airspace over the United Arab Emirates virtually empty. Emirates Airlines says it suspended all operations to and from Dubai until tomorrow. The airline says it's actively monitoring the situation and engaging with relevant authorities. Airports in Abu Dhabi and Doha are also affected, and there are ripple effects at other airports. Dubai International is one of the busiest airports in the world. Other airports in the region are hubs for passengers traveling between Asia and Europe. The Israeli airline El Al says it's scheduling rescue flights for stranded passengers that will take off as soon as Israel's main airport reopens, and it gets approval from the Israeli government. I'm Nancy Marshall-Gensher for Marketplace. And in New York, I'm Sabri Beneshour with the Marketplace Morning Report. From APM, American Public Media. America's housing system is under strain. From natural disasters to the rising cost of shelter, the challenges we face and the solutions we embrace will shape how we live for the next hundred years. I'm David Brancaccio, host of Marketplace Morning Report, and I've been working with This Old House Radio Hour on a special podcast episode that explores how Americans are reimagining housing in this changing world. It's called Building Tomorrow. From wildfire-resistant houses in California to tiny home communities in Texas to a super-duper energy-efficient house in the Northeast, this special blends innovation, new business models, and personal stories to explore how resilience, affordability, and our climate reality are redefining what home looks like. To listen, go to Marketplace Morning Report in your podcast app.