From Kat Romanesko, via social media:
Alright, let me put my old reservoir engineer hat back on for a minute, because when I hear politicians and television talking heads explaining how oil markets respond to something like the strike on Kharg Island, I can practically hear every drilling superintendent, completions engineer, and pipeline scheduler in Texas muttering the same thing: that’s not how any of this works. From the outside this looks simple. America hits a strategic oil location, Iran threatens the Strait of Hormuz, oil prices jump, and according to the cable news experts American producers immediately crank up drilling and save the world with a heroic wave of new barrels. It makes a great television story. It also has very little to do with how oil production actually happens.
First, understand what Kharg Island is. It isn’t just another island in the Persian Gulf. It is the loading dock for most of Iran’s oil exports, with roughly ninety percent of their crude moving through that terminal before heading toward Asian markets. The interesting detail in the strike reports is that the military infrastructure around the island was hit but the oil loading facilities themselves were left standing. To people outside the industry that seems odd. To anyone who understands oil logistics it makes perfect sense, because you don’t have to destroy an oil terminal to stop exports. You only have to make insurers nervous. The most powerful choke point in global oil trade today is not a navy or a missile battery, it is a room full of insurance underwriters in London deciding whether a tanker is insurable. Tankers carry war-risk insurance, and the moment missiles start flying around loading terminals those insurers either jack up premiums to absurd levels or stop writing policies entirely. Once that happens ships stop sailing because no bank, charter company, or shipping operator will send a hundred-million-dollar vessel into a combat zone uninsured. The terminal can be sitting there perfectly intact, tanks full of crude and loading arms ready, and nothing moves because tankers are anchored offshore waiting for insurance clearance. You’ve effectively choked off exports without lighting a single storage tank on fire.
Now let’s talk about the next part television always gets wrong. The moment oil prices spike, commentators start saying American producers will just drill more wells. I spent decades working reservoir engineering and production, and drilling programs are not decided by one exciting week of oil prices. Wells get drilled when companies believe prices will stay high long enough for those wells to make money. That means sustained prices, forward contracts, pipeline capacity, rigs, frac crews, casing and tubing, water handling, and somewhere to sell the oil once it comes out of the ground. Oil wells are not lemonade stands you open because it’s a hot afternoon. Even in the Permian Basin, where development moves faster than almost anywhere else on Earth, there are still physics and logistics involved. A horizontal well with a ten to twelve thousand foot lateral takes a couple of weeks to drill, then it waits for completion crews, then the frac takes another week or so, then flowback, then tie-in to gathering lines and pipelines. If everything goes smoothly you might see first production in a month or two, and that assumes rigs are already contracted, pipe is available, frac crews exist, pipelines have space, and someone has agreed to buy the oil. Scaling production across a basin takes months of planning and billions in capital. Companies do that when they believe the price environment is durable, not because oil spiked for two weeks during a geopolitical crisis. Oil markets respond to expectations, not headlines.
Meanwhile the insurance market can do something much faster and far more powerful. By making tanker voyages risky or uninsurable it can reduce global oil flows almost overnight without firing another shot. That brings us back to Kharg Island. By striking military infrastructure around Iran’s main export terminal while leaving the oil facilities intact, the move sends a very specific signal: the oil lifeline is still there, but the risk around it just went through the roof. That pressures Iran’s revenue without immediately destroying global supply and injects uncertainty into oil markets, which pushes prices higher. The irony is that oil markets are resilient. If disruptions last long enough, supply eventually reroutes. More crude flows from the Americas, Africa, and the North Atlantic, shipping routes get longer, tanker rates rise, and drilling programs eventually expand. But none of that happens overnight. Reservoirs don’t care about political speeches, steel pipe doesn’t appear because a senator demanded it, and drilling rigs don’t teleport into place because gasoline prices jumped on Tuesday. Oil production runs on geology, engineering, capital cycles, and logistics. The insurance market, on the other hand, runs on fear, and right now fear is doing exactly what missiles alone often cannot: slowing the flow of oil.
~ Kat Romenesko