The Case for an Oil Price Crash
Iran just woke up the world to a simple fact: the Middle East is not a reliable place to source fossil fuels (oil and natural gas). Not just now, but forever in the future as far as the eye can see. Not unlike when Russia attacked Ukraine and Europe suddenly realized it had built its energy future on a foundation that could be weaponized overnight, the customers of Gulf oil are now facing away from the region — and the war has given powerful new impetus to finding alternative energy sources that no climate policy ever could.
The world waited for communist Russia to become a responsible global player, and when given the chance after the Soviet collapse, within twenty years it was back to the same place — nationalism, authoritarianism, and military aggression. Change in some parts of the world moves very slowly. Russia and the Middle East both appear to be in that pattern. Nobody making serious long-term infrastructure decisions can afford to bet otherwise.
What the War Did
Before the conflict, the Strait of Hormuz carried 15 million barrels per day of crude exports and 20% of global LNG. When Iran closed it, the Middle East lost more than 12 million barrels of oil equivalent per day. Iraq’s output fell 70%. Export losses averaged nearly $2 billion per day — for four months. North of $240 billion in lost revenue, before counting infrastructure damage and defense costs.
The IEA called it the largest supply disruption in recorded history. The world got a four-month preview of energy without the Middle East. Nobody liked what they saw. Nobody is going to forget it.
Three Forces, One Direction
They need to make up for what they lost. Every Gulf state is staring at a fiscal hole with one solution: pump every barrel possible at whatever price the market will bear. Saudi Arabia’s budget breakeven is north of $90 — they’re selling at $79. The UAE spent $5 billion intercepting missiles. Iraq lost 70% of exports for four months. This is financial survival, not strategy. The reservoir physics enforces it too — wells abandoned mid-operation don’t restart cleanly. Some capacity is permanently gone. The remaining wells must pump harder to compensate.
OPEC is broken. The UAE formally withdrew from OPEC and OPEC+ in May — ending 59 years of membership. Iraq will pump everything its damaged infrastructure can handle. Russia never complied with cuts anyway. There is no mechanism left to coordinate a cut that would actually hold.
The world is turning away. India doubled its oil supplier nations from 20 to 40 in weeks. The Americas quintet — the U.S. at 13.7 million barrels per day, Canada, Brazil, Guyana, and Argentina — accelerated during the war, not slowed. Nuclear is back on the table across Asia and Europe. The last time this happened was 1973, when the Arab embargo triggered the IEA, U.S. strategic reserves, and France going 75% nuclear within fifteen years. The Gulf states are reopening Hormuz into a market that spent four months replacing them — and that is now looking forward to permanently replacing them as a major source.
The Suppliers Know Exactly What’s Happening
The Middle Eastern producers see the picture clearly. The window to sell is open now and nobody can guarantee how long it stays open. For the next sixty days every Gulf producer will pump at maximum capacity — not because a committee decided to, but because there is no rational alternative. The fiscal damage demands it. The broken cartel permits it. And the awareness that their customer base is actively building away makes every barrel left in the ground feel like one that may never find a buyer.
What the financial models miss is the human reality underneath the numbers. These are not calm boardrooms making strategic production decisions. These are governments simultaneously facing empty revenue accounts after four months of near-zero exports, permanent defense budgets that just doubled overnight, sovereign wealth funds raided to cover wartime deficits, and the slow-motion realization that their customer base is structurally leaving. Vision 2030 — the entire project of building a post-oil economy before the oil money runs out — just got set back years. The patronage networks, the subsidies, the social contracts that keep these regimes stable all run on oil revenue. Below $90, Saudi Arabia cannot fund all of them at once. That is not a government that carefully manages supply to defend a price. That is a government under existential pressure that needs cash today, tomorrow, and every day after that. Desperation is a more powerful market force than any cartel mechanism, and every analyst pricing in Saudi discipline is missing it.
Nobody in Riyadh, Abu Dhabi, or Kuwait City is making plans based on the Iran situation improving in the next several years. The rational posture is to treat every period of open straits as a selling opportunity, not a return to normalcy.
The result is an uncontrolled glut. A race — every producer maximizing volume simultaneously, into a market already building alternatives, on top of a pre-war surplus the war temporarily masked. There is no mechanism left to stop it.
The Forecasts Are Wrong
The deal was signed June 19. Hormuz is still physically largely closed — tanker traffic 95% below pre-war, 800 vessels trapped, mines in the shipping lanes that will take weeks to clear. This will be a slow-motion car crash, not a sudden tidal wave. But the market isn’t waiting. Brent dropped below $80 on the announcement alone. When the oil physically starts flowing again, prices won’t recover. They will keep falling.
The restocking wave provides a temporary cushion — reserves were drained to the bone and the first returning supply gets absorbed by governments rebuilding buffers. That could hold prices near $75 through Q3. But there is a deeper irony nobody is discussing: every country filling strategic reserves is buying future oil consumption today at a discount, and then needing less Gulf oil tomorrow because the tanks are full and alternatives are being built simultaneously. The suppliers are selling forward at fire-sale prices into demand that will not repeat. The short-term revenue relief accelerates the long-term demand destruction.
Goldman’s $75 Brent forecast for 2027 will move lower. Every number on the street assumes a return to something like February 27. It won’t happen. The real floor is wherever new drilling stops being profitable — roughly $50-55 WTI for shale. Middle Eastern production costs run just $3-5 per barrel, so they can pump profitably at almost any price. But their governments cannot function below $90.
That gap is the engine of the crash. Normally, when prices fall too low, producers cut output to push them back up. The Gulf states can’t. Their wells stay profitable even at $40, so there is no reason to stop pumping — and their governments are so starved for revenue below $90 that they have to pump even more to make up the difference. Falling prices trigger more production, not less. The mechanism that normally puts a floor under oil now runs in reverse. And there is no OPEC left to break the cycle.
The Beginning of the End
The world is simply tired of the Middle East. Not just Iran — though Iran is the accelerant — but the entire half-century of dependency, manipulation, and geopolitical extortion. Saudi Arabia and OPEC spent fifty years treating oil as a weapon, engineering scarcity, extracting a premium the market would never have assigned on pure economics. The rest of the world went along because it had no choice. Now it does. The customers are walking out the door with the urgency of people who just got a very clear warning about what staying costs.