How the chaos in the Middle East could affect New Mexico’s oil production

This week the United States and allies released 400 million barrels of oil from the International Energy Agency’s strategic petroleum reserves, 172 million coming from the U.S. 

The move comes in the wake of U.S. and Israeli bombings of Iran, which killed Iranian Supreme Leader Ali Khamenei and left the Strait of Hormuz, a critical oil shipping route, all but shuttered — potentially for weeks or months. 

This will “substantially reduce the oil prices as we end this threat to America and this threat to the world,” President Donald Trump told a crowd at a rally in Kentucky on Wednesday. 

When the 32 governments that form the IEA release oil during a crisis, it typically calms markets, but oil hit over $100 a barrel the morning following the Wednesday announcement and remained there throughout the week. 

“The SPR release isn’t likely to lower prices very much as long as the Strait remains shut,” Kevin Book, who heads the research team and covers oil, gas, and coal policy at ClearView Energy Partners LLC, an independent Washington, D.C.-based firm that examines macro energy policy, told the Journal. “It seems more likely to keep them from rising as much as they otherwise might.”

Typically, short-term oil price disruptions don’t have much of an effect on production — so, aside from benefiting from sky-high prices, New Mexican oil producers at first didn’t think they’d see much of a production impact from the war. But the closure of the strait, combined with the bombing of many major oil refineries — including the largest in Saudi Arabia, the United Arab Emirates and Israel — and the SPR drawdown all mean that oil production capacity will remain narrow for months, if not years. 

What does all this action 7,500 miles away mean for New Mexico? Aside from higher gas prices at the pump, New Mexico is the second-largest oil and third-largest natural gas-producing state. And all this international drama is increasingly going to affect New Mexico’s oil and gas production — and therefore the state budget.

Lawmakers coming out of last month’s Roundhouse session worried that the record growth the Permian Basin had gifted New Mexico was slowing, or coming to an end. At the very least, these turns of events extend that rally another couple of years.

Trump has said the hostilities in Iran could last another four weeks — or longer. “We don’t want to leave early, do we?” Trump said in Kentucky. “We got to finish the job.”

The U.S. has pledged to replenish 200 million barrels to the reserve within a year. But the government typically waits until markets settle and aims for when oil reaches $67 a barrel to begin those repurchases — a price oil futures don’t predict oil will hit any time soon, likely not until 2027, according to the Wall Street Journal. 

“On its own, therefore, we would not expect the drawdown to deter drilling very much,” Book said. “To the extent that IEA barrels replenish inventories depleted by shut-ins and the Strait closure, the collective action could reduce futures market prices in later months. But if the war continues, and the Strait does not reopen, shale patch producers will still get plenty of price signals from a tight market.”

Many of those producers are here in New Mexico. This year was forecast to see little oil output increase, given the projected lower barrel prices. But given the strong push from the Trump administration for more production and changing market conditions caused by the events in the Middle East, it is likely that U.S. production will ramp up, according to Frank Maisano, an oil and gas media relations expert with Bracewell LLP in Washington, D.C.

This has been a goal of the administration, though an indirect one: to increase U.S. oil production. Though some sources in the White House want to go further and limit U.S. gas exports to further stimulate domestic production. That, in the view of producers, is a step too far.

“The SPR was designed for disruptions like this, and the release is an appropriate step at a moment of geopolitical uncertainty,” Mike Somers, the president of the American Petroleum Institute, posted on X. “On the other hand, bad policy ideas others have raised, like export restrictions, would have serious unintended consequences.”

Instead, the Trump administration this week eased sanctions against Russia to help ease the flow of oil, even though the war in Ukraine remains very much a hot-button topic between the U.S. and Russia. 

Meanwhile, the one country that can most easily weather high oil prices is China, which has the world’s largest strategic reserves. That said, large parts of China’s oil supply came from Venezuela — whose president Trump ordered kidnapped and arrested in January — and Iran. So, they, too, will be looking for other sources of oil to replenish their reserves in the months to come.