The U.S. Oil Sector’s Role in Restraining Prices

The outbreak of conflict in the Middle East in early 2026 triggered a sharp decline in global oil supply, leading to a significant increase in prices. However, the U.S. oil sector played a crucial role in mitigating the impact. The sector's steady rise in drilling helped create a substantial oversupply in the global market prior to the conflict, which facilitated offsetting the decline in Middle East oil production.

Moreover, U.S. commercial and government inventories were rapidly reduced, filling half the gap between global supply and demand by the second quarter, according to estimates. Yet, oil reserves are finite, and U.S. stockpiles began to dwindle in July. Consequently, the persistent global production shortfall was addressed through the depletion of inventories in other parts of the world.

The U.S. economy has historically been susceptible to geopolitical events. Gasoline prices skyrocketed in 1973 due to OPEC's embargo and again in 1979, underscoring the vulnerability of domestic gasoline prices to foreign developments. This vulnerability prompted the creation of the Strategic Petroleum Reserve (SPR) in the 1970s, a government stockpile intended for release in times of oil supply threats.

Nonetheless, little could be done to address the underlying trend of increasing oil demand coupled with stagnant drilling, which resulted in imports surpassing exports by 9 million barrels per day (mb/d) in 2010, accounting for nearly half of domestic consumption.

The landscape changed with the advent of fracking technology. As illustrated by the following chart, U.S. crude oil and other liquid fuel production surged from 8 mb/d in 2010 to 21 mb/d in 2025, representing 70 percent of the total increase during this period. The transformation was facilitated by the 2015 repeal of a 1975 law that had largely restricted crude oil exports, as the industry argued that the Permian Basin in New Mexico and Texas had the potential to surpass the Gulf region's refining capacity.

The industry advocated for permitting the export of crude oil to meet this demand, which would benefit consumers by increasing global production and subsequently lowering domestic prices. The chart below demonstrates the impact of the 2015 repeal on trade flows, showing a six mb/d increase in petroleum exports from 2015 to 2025, coupled with a two mb/d decrease in imports during the same period.

Despite having been oversupplied, the conflict with Iran caused a sudden shortage in the petroleum market. The U.S. Energy Information Administration (EIA) estimates that global liquid fuel production dropped by 12 mb/d in March, leaving the country with a substantial oversupply. This oversupply significantly reduced the extent of the shortfall that needed to be compensated for.

The gap between supply and demand led to a rapid decline in inventories, with 5 mb/d disappearing in March, April, and May, before resuming a more moderate rate of 3.5 mb/d in the second quarter of 2026. The U.S. oil sector played a pivotal role in bridging the supply gap, either by increasing production or reducing inventories to maintain a balance between supply and demand.