Oil has been trading above $100 a barrel for days, at a moment when the global energy system is operating with less margin than ever. According to the International Energy Agency (IEA), the world produces around 103 million barrels per day, but a key portion of that supply is currently blocked or off the market.
Since the outbreak of the conflict in the Middle East, stranded tankers, damaged infrastructure and disrupted routes have withdrawn millions of barrels per day from circulation, upending everything. Governments and international bodies have reacted by releasing reserves and seeking swift solutions, but the imbalance remains and prices reflect it almost in real time.
The big problem lies in the Strait of Hormuz and the oil that cannot exit
For the price of oil to truly fall, the market needs something very concrete: more barrels available immediately and on a sustained basis. That means restoring the flow from the Middle East, increasing actual supply and reducing the geopolitical tension that is driving prices higher. The problem is that right now the opposite is happening and the uncertainty is pushing prices up.
Before the crisis, through the Strait of Hormuz circulated about 15 million barrels per day of crude and another 5 million of refined products. It’s roughly 20% of global consumption, according to the IEA. But the impact isn’t limited to transport: key countries such as Saudi Arabia, Iran, Iraq, Kuwait or the United Arab Emirates have seen their export capacity constrained.
In some cases, production has fallen because storage tanks are full and there is nowhere for that oil to go. The IEA itself estimates that this situation has removed up to 10 million barrels per day from the market. In that context, restoring transit through Hormuz is the most important action to relieve price pressure, as the international agency emphasizes.
Emergency measures add up, but they don’t fill the hole
The global response has been swift. IEA member countries have released around 400 million barrels from strategic reserves, the largest volume in history. The United States has also tapped its strategic reserve and has relaxed sanctions to facilitate the entry of more crude into the market.
The problem is scale. Mark Barteau, a chemical engineering professor at Texas A&M, explained to the LA Times that these measures add one to two million barrels per day each, and that figure falls far short of the current deficit. In that sense, Daniel Sternoff of the Columbia Center on Global Energy Policy also noted that lifting sanctions on oil already in transit, such as Iranian crude, does not actually increase supply. It simply expands the number of buyers and could end up pushing its price higher.
Neither producing more nor redirecting supply is enough in the short term
Saudi Arabia has attempted to bypass the blockade by using its East–West pipeline to the Red Sea, with a capacity of about 5 million barrels per day. Still, that system was already in use and leaves little room for additional margin, warns researcher Michael Lynch: “It’s useful, but it doesn’t change the rules of the game.”
According to him, “If we fire up all platforms right now and within a week the war ends and the price drops by $20, no one will want to invest in long-term production. If this lasts another six weeks, we could have a very serious problem.” At the same time, the U.S. cannot compensate for the global deficit either.
Its production runs about 13.7 million barrels per day, but its refineries need more than 16 million and rely on imports. Moreover, much of its facilities are geared toward heavy crude, while the country mainly produces light crude.
Supply, demand, and geopolitics: the three keys that move the price
The behavior of oil responds to several factors acting simultaneously. On one hand is the available supply: when production rises, prices tend to ease. Global demand also matters. In periods of economic growth, consumption rises and so do prices.
Parallel to this is geopolitics, which introduces uncertainty and triggers sharp increases when there are risks of supply interruptions. Added to this are the financial markets, since oil is traded as a futures asset and investors anticipate scenarios, which can accelerate both increases and decreases. This combination is what explains the current volatility.
Images | Unsplash, Wikipedia
