The International Energy Agency (IEA), a developed nation agency established in the 1970s to deal precisely with oil crises like the ones we face now, has announced something unusual.
Its members will, as most of the world’s richest countries say Release unprecedented amounts of oil from their national inventory to the global market in the coming weeks.
This emergency stockpile release is more than double the last record of 400 million barrels of oil that came from its members’ stockpiles around the world. Here’s the remarkable thing, though: far from falling, oil prices haven’t just budged. After the announcement, Brent crude oil rose by nearly 25% before the attacks began in the Gulf.
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Tankers sit in Muscat, Oman as Iran vows to close the Strait of Hormuz. Image: Reuters
All of which begs the question: Why? The short answer is that the world is likely to remain oil-deficient even after this infusion of new oil. The long answer goes back to the fundamental nature of the oil market.
A good way to think of the oil market is as an enormous set of pipes through which crude oil and its products flow continuously. More important than how much oil is in the ground in the form of reservoirs or reserves is something much simpler: how much oil is pumped through the global system every day.
And in recent years, the amount pumped through the system every day has worked out to about 100 million barrels of oil. Now, these numbers will rise and fall as the seasons turn and perhaps in the coming years people will adopt electric cars and find alternatives to fossil fuels. But the important thing to keep in mind is that, for now, most of the world’s living standards – our access to transportation, electricity, consumer goods, medicine and the rest – depend on the 100 million barrels of oil pumped through the world’s pipes.
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All of which brings us back to the Persian Gulf, which is responsible for about 30% of the world’s oil, about 15 million barrels of which pass through the Strait of Hormuz every day. The heart of the energy shock that has the world reeling comes back to the fact that we are facing a 15 million barrel per day oil shortage. In other words, it’s all about that gap — between the oil we need to run the world and the oil we actually have.
There just isn’t enough supply
That brings us back to the IEA’s emergency release. While the overall number is certainly higher, the number the firm didn’t release Tuesday is more important: how much oil it expects to come out each day. In other words, how much will those emergency supplies fill the 15 million barrel gap?
The expectation among analysts is that this number will be 4-5 million barrels, which is nothing, but as you know if you have basic math, that leaves the world short of at least 10 million barrels of oil every day.
There are other sources of oil. For one thing, Saudi Arabia, and to a lesser extent the United Arab Emirates, can pump more oil through their pipelines to ports that aren’t inside the Gulf (in other words, tankers don’t have to brave the strait). That could mean, optimistically, another 5.7 million barrels of oil.
On top of this, a handful of ships are still passing through Hormuz. An educated guess suggests it could bring in another half a million or perhaps a million barrels outside.
Add it all up, though, and take the best-case scenario, and you’re still talking about a 4 million barrel oil deficit for the global economy. This is far less dire than the 15 million shortfall we started with, but not enough to meet global oil consumption.
Why are prices still high?
This is at least part of the explanation for why oil prices are still high and why countries around the world are feeling the effects. Here in Europe, we focus on what we are starting to see – the effects of higher petrol prices and bills. But it is also emerging elsewhere, particularly in Asia. Indian oil refineries are closing; Provinces are rationing Liquefied Petroleum Gas (LPG) supplies to local households. Workers in Thailand and Vietnam are being forced to work from home to protect petrol supplies.
And as it goes on, we’ll see more of these effects. The world faces an energy gap; It is not clear how it will be bridged.
