extraordinary-announcement-not-enough-to-lower-oil-price

The International Energy Agency (IEA), a developed nation body established in the 1970s to deal with the oil crisis like the one we are facing now, has announced something extraordinary.

Its members, i.e., most of the world’s rich countries, will release unprecedented amounts of oil from their national stockpiles to the global market in the coming weeks.

This emergency reserves release is more than double the previous record, which was 400 million barrels of oil coming from its members’ reserves around the world. Yet here’s the surprising thing: oil prices barely rose, let alone fell. Following the announcement, Brent crude was still about 25% higher than before the attacks in the Gulf began.

Money Blog: Revolut to become UK bank – this is what it means

All of this activity raises the question: why? The short answer is that even with this new supply of oil, the world will likely 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 a giant set of pipes through which crude oil and its products are constantly flowing. More important than how much oil is in the ground in the form of reservoirs or reserves is how much oil is pumped through the global system every day.

And recently, the amount pumped through the system has grown to nearly 100 million barrels of oil per day. Now, as the climate changes, these numbers keep going up and down and perhaps, in the coming years, may go down as people adopt electric cars and look for alternatives to fossil fuels. But the main thing to keep in your mind is that right now, much of the world’s standard of living – our access to transportation, electricity, consumer goods, pharmaceuticals and the rest – depends on 100 million barrels of oil pumped through the world’s pipes.

Latest Iran war: 32 countries agree to biggest oil release ever by targeting ships

All this news brings us back to the Persian Gulf, which is responsible for about 30% of the world’s oil, with about 15 million barrels of it passing through the Strait of Hormuz every day. The crux of the energy shock the world is facing is that it is facing a shortage of 15 million barrels of oil per day. In other words, it’s all about the gap – between the oil we need to keep the world running and the oil we actually have.

There just isn’t enough supply

This brings us back to the IEA’s emergency release. While the total number is certainly high, even more important is a number the organisation did not release Tuesday: how much oil it expects to produce each day. In other words, how much of the 15 million barrel gap will those emergency supplies make up?

The expectation among analysts is that this number will be 4-5 million barrels, which is nothing more than, as you may know if you have the rudimentary math, the world being short of at least 10 million barrels of oil every day.

There are other sources of oil also.

For one thing, Saudi Arabia, and to a lesser extent the United Arab Emirates, can pump more oil through their pipelines to ports that are not inside the Gulf (in other words, meaning tankers do not need to face the strait). Optimistically, such a scenario could mean another 5.7 million barrels of oil.

Hormuz is still being traversed by some ships. An educated guess suggests that it could bring in an additional five million or, perhaps, one million barrels from outside.

However, even considering the best-case scenario, overall you are still talking about a loss of 4 million barrels of oil for the global economy. This figure is much less scary than the $15 million reduction we started with, but still not enough to cover global oil consumption.

Why are prices still high?

This is at least partially responsible for the high oil prices and the global impact. We focus here in Europe on the things we are starting to see – on higher petrol prices and the implications for bills. But it is also spreading elsewhere, especially in Asia. Indian oil refineries are closing; provinces are cutting the supply of liquefied petroleum gas (LPG) to local households. Workers in Thailand and Vietnam are being urged to work from home to protect petrol supplies.

And the longer this goes on, the greater the effects we will see. The world is facing an energy shortage; it is not clear how it bridges this.