The International Energy Agency (IEA), the developed nation body founded in the 1970s to deal with oil crises precisely like the one we’re now facing, has announced something extraordinary.
Its members, which is to say most of the world’s rich nations, will release an unprecedented amount of oil from their national stockpiles into the global market in the coming weeks.
This emergency stockpile release is more than double the last record, a whopping 400 million barrels of oil, to come from the stockpiles of its members around the world. Yet here’s the striking thing: far from falling, oil prices barely budged. After the announcement, Brent crude was still around 25% higher than before the attacks in the Gulf began.
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All of which raises the question: why? The short answer is that even after this new infusion of oil, the world is likely to remain short of oil. The long answer comes back to the fundamental nature of the oil market.
The best way to think of the oil market is as an enormous set of pipes through which crude oil and its products are constantly flowing. What matters, far more than how much oil there is in the ground, either in the form of reservoirs or stockpiles, is something more simple: how much oil is pumped through the global system every day.
And in recent years, the amount pumped through the system each day has worked out at about 100 million barrels of oil. Now, these numbers go up and down as the seasons turn and perhaps, in the coming years, might go down as people adopt electric cars and find alternatives to fossil fuels. But the key thing to keep in the back of your mind is that for the time being, much of the world’s living standards – our access to transportation, to power, to consumer goods, pharmaceuticals and the rest – depends on that 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, of which around 15 million barrels pass through the Strait of Hormuz each day. The heart of the energy shock the world is getting its head round comes back to the fact that it is running short of 15 million barrels of oil a day. In other words, it’s all about that gap – between the oil we need to keep the world functioning and the oil we actually have.
Just not enough supply
That brings us back to the IEA’s emergency release. While the overall number is certainly high, what matters even more is a number the organisation didn’t release on Tuesday: how much of that oil it expects to come out each day. In other words, how much of the 15 million barrel gap will those emergency supplies fill?
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The expectation among analysts is that the number will be 4-5 million barrels, which is not nothing but, as you’ll know if you have elementary mathematics, still leaves the world at least 10 million barrels short of oil each day.
There are other sources of oil. For one thing, Saudi Arabia, and to a lesser extent the United Arab Emirates, could pump more oil through their pipelines to ports that are not inside the Gulf (in other words, meaning tankers do not need to brave the straits). That might, optimistically, mean another 5.7 million barrels of oil.
On top of this, there are a handful of ships still passing through Hormuz. An educated guess suggests this might bring in another half a million or maybe, at the outside, a million barrels.
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Tot it all up, though, taking the very best case scenario, and you’re still talking about a shortfall of 4 million barrels of oil for the global economy. This is far less scary than the 15 million shortfall we started off with, but it is nonetheless not enough to satisfy global oil consumption.
Why prices are still high
Which is at least part of the explanation for why oil prices are still so high and why, all around the world, countries are feeling the impacts. We tend to focus, here in Europe, on the stuff we are beginning to see – on higher petrol prices and the implications for bills. But it’s fanning out elsewhere too, especially in Asia. Indian oil refineries are shutting down; provinces are rationing liquefied petroleum gas (LPG) supplies for local households. Workers in Thailand and Vietnam are being urged to work from home to safeguard petrol supplies.
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And the longer this goes on, the more of these impacts we will see. The world is facing an energy gap; it’s not clear how it bridges it.
