The conflict in Iran resulted in closure of the Strait of Hormuz, a passageway for approximately 20% of global oil trade flows. Prior to the conflict, global oil supply had increased to 108 million barrels per day (mmbbls/day) in 2025 as OPEC increased production, causing excess supply in the global market. The strait’s closure in late February forced the Gulf states to shut in 10.5 mmbbls/day in April, according to the U.S. Energy Information Administration.
As a result, global oil supply declined by 13% to 95 mmbbls/day, well below pre-conflict expectations of 107 mmbbls/day. Even if shipping through the strait resumes in June, global production is not projected to fully recover until the end of this year, the EIA reports.
Oil prices increased markedly following the supply disruption, but it remains unclear whether they will support a substantial increase in drilling for local producers.
In early May, oil prices were up more than 55% from the start of the conflict, averaging $102, well above the $79 average price needed to substantially increase drilling in March. Despite elevated prices, uncertainty over the persistence of the blockade at the Strait of Hormuz has clouded the drilling outlook.
Oil and gas firms in the Tenth Federal Reserve District have seen increased profits resulting from higher oil prices but have yet to increase drilling activity. In March, 53% of firms surveyed reported higher profits from last quarter, but only 16% of firms reported increased drilling.
In fact, 69% of energy firms reported no change in drilling from the previous quarter. A larger share (38%) of firms expected drilling to increase in the next six months, but a majority still anticipated steady or even decreased activity.
Although higher oil prices have supported profits for Oklahoma producers, Oklahoma’s production and revenues are more concentrated in natural gas than in oil. In Oklahoma, natural gas accounted for nearly three-quarters of fossil fuel production from 2015 to 2025, compared with 60% of aggregate U.S. production.
Thus, any production increases related to the price shock could occur in oil-heavy basins in other parts of the country, particularly the Permian Basin in Texas and New Mexico. Natural gas is produced in greater volumes, but oil is valued higher than natural gas. Accordingly, oil made up slightly more than half of implied revenues in Oklahoma from 2015 to 2025 but accounted for more than two-thirds of total U.S. revenue.
Oklahoma’s concentration in natural gas can make marginal drilling activity sensitive to movements in natural gas prices, which have not seen increases from the Iran conflict as oil prices have. Oil markets are global due to the commodity’s relative ease of transportation, meaning that price increases from shortages in the Middle East, Europe, and Asia also cause price increases in the United States.
By contrast, natural gas markets tend to be more regional because it can be transported only by pipeline or liquefaction for export abroad. Natural gas shortages due to the Iran conflict have caused prices to nearly double in Europe and Asia, but U.S. prices decreased by 9% in the same period due to ample domestic natural gas supply and limited ability to increase liquified natural gas (LNG) exports out of the country.
In recent years, drilling for natural gas has been unprofitable for producers, and Oklahoma’s drilling activity has generally decreased when oil prices increase relative to gas prices, as they have since the Iran conflict. U.S. natural gas has traded below the average profitable price most weeks since 2023, and futures markets anticipate it will continue to do so.
Historically low natural gas prices are primarily caused by large volumes of associated gas (natural gas that is a byproduct of drilling for oil) from major oil-producing basins that increase the supply of natural gas above levels that can be easily transported. This generally occurs when oil prices increase relative to natural gas prices, incentivizing additional drilling for oil, which produces excess natural gas.
When the oil-gas price ratio increased well past its 10-year average in 2023 and 2024, Oklahoma’s rig count decreased to as low as 33 active rigs. In 2025, the ratio decreased below its 10-year average, and the state’s drilling activity peaked at more than 50 active rigs.
Since the Iran conflict, the oil-gas price ratio has more than doubled, and futures markets as of May 13 expected it to remain higher than was priced before the conflict began on Feb. 27. Relatively higher oil prices could limit additional increases in Oklahoma’s drilling activity, as increased associated gas production from other basins in the U.S. could reduce the price of natural gas.
Increases in Oklahoma’s tax revenues from this oil price shock may be limited due to lower natural gas prices. Severance taxes – which constituted 8% of Oklahoma’s total tax revenues over the past 10 years – are taxes on revenue collected from natural resource extraction.
In the early 2000s before the shale oil boom, natural gas accounted for the vast majority of the state’s oil and gas revenues. Oil’s share of revenues has increased in the past two decades, but natural gas still accounted for 46% of implied revenues from 2015 to 2025. As such, severance tax collections in Oklahoma are driven by revenues from both oil and natural gas production.
Oklahoma’s severance tax collections peaked in 2008 and again in 2022, both years with historically high natural gas prices. In 2025, increases in natural gas prices drove annual severance tax collections to $1.1 billion, even as oil prices declined.
Price and production projections for 2026 imply that Oklahoma’s oil revenues will increase while its natural gas revenues stay mostly steady, meaning that severance tax collections will likely increase this year. However, natural gas prices would need to be much higher than currently projected for severance tax revenues to increase anywhere near their 2022 peak of almost $2 billion.
Elevated oil prices are also less likely to boost employment in Oklahoma because of increased productivity and capital discipline in the energy sector. Historically, changes in oil and gas revenues in the state coincided with commensurate changes in the number of active rigs and employment in the mining sector, as increased cash flow allowed firms to increase investment. However, in recent years, oil and gas firms have tended to reinvest a smaller share of cash flows into production growth, reflecting a broader shift toward capital discipline and financial resilience.
During the previous oil and natural gas price shock in 2022, Oklahoma’s oil and gas revenues nearly doubled from their 2017-19 levels, but the number of active rigs and mining employees were down 40% to 50% from the same period. This can also be explained by increased drilling productivity. New oil and gas production per foot drilled in basins across the U.S. and Oklahoma has more than doubled since the onset of the shale revolution in the 2010s, resulting in less drilling and fewer workers needed to increase production. Overall, greater capital discipline and drilling productivity likely curb drilling and employment growth in the state resulting from sustained higher oil prices.
The Iran conflict’s disruption to global oil supply elevated WTI oil prices above $100 per barrel, boosting profitability for Oklahoma’s energy producers. However, these elevated prices may not spill over to Oklahoma’s broader economy. Regional producers have not yet increased drilling despite higher prices, as firms have varied price thresholds for substantially increasing drilling and the persistence of the supply shock remains unclear.
Oklahoma’s higher concentration in natural gas further limits potential drilling increases, as natural gas prices remain depressed by ample domestic supply and limited export capacity. While the magnitude and duration of this oil price shock remain uncertain, Oklahoma’s energy-driven economic gains may be more modest and concentrated compared with previous shocks.
Chase Farha is a research associate in the Regional Affairs department at the Oklahoma City branch of the Federal Reserve Bank of Kansas City. Cortney Cowley serves as Oklahoma City branch executive and assistant vice president for the Federal Reserve Bank of Kansas City.