Nothing in the tank
The crisis in oil markets will get bigger before it goes away
As stocks dwindle, further price rises are inevitable
Illustration: Carolina MoscosoWHAT WAS once unthinkable now appears unending.
Most energy traders used to assume that, even under attack, Iran would not close the Strait of Hormuz, the narrow chokepoint through which almost a fifth of the world’s oil ordinarily flows.
Doing so would antagonise its neighbours in the Gulf, starve its customers in Asia and sever its own economic lifeline.
Even if Iran attempted a blockade, America, the traders assumed, would quickly put an end to it.
Yet two months after America and Israel began bombing Iran, and Iran began targeting commercial vessels in retaliation, traffic in Hormuz remains near zero.
Diplomatic efforts to get it flowing again are intermittent and inconclusive.
Although a negotiated resolution is always possible, it is also conceivable that the strait could stay shut indefinitely.
Glance at oil prices, though, and the consternation appears relatively muted.
Even after a sharp rise in recent days, Brent crude futures, at over $120 a barrel, are still well below the $150-200 many analysts predicted in March if the strait were to stay closed for a long period.
Parts of Asia are contending with acute shortages or scrambling to avoid them, but across most of the rich world, daily life has scarcely been affected.
Petrol prices are up and airfares have climbed, but forecasts for economic growth have been trimmed only modestly.
Stockmarkets are near record highs.
Against all odds, the world’s economy appears to be taking the biggest supply shock in the history of the oil market in its stride.
Markets always find equilibrium—the question is only at what level.
Optimists draw comfort from 2022, when most Western countries stopped buying oil from Russia after it invaded Ukraine: oil peaked then at $129 without triggering a global recession.
But just 3m barrels a day (b/d) of Russian oil—3% of world supply—were involved, and most of that was rerouted to Asia.
Every day Hormuz stays closed, nearly five times that volume is completely removed from global supply.
Even if the strait were to reopen tomorrow, some 3% of the world’s annual output has probably already been forfeited, given inevitable delays getting export volumes back to normal.
A deficit of that magnitude cannot be papered over for long.
The world is just weeks away from a severe reckoning.
Crude calculations
The relative composure in markets belies some daunting arithmetic.
Over March and April last year 18.3m b/d of crude and refined products exited the strait.
Allow for a trickle still getting through, plus the extra oil that can be squeezed through two pipelines bypassing the strait—one in the United Arab Emirates and one in Saudi Arabia—and the net deficit narrows to around 13m b/d.
Add in also 2m b/d of supply growth outside the Gulf but subtract 1.3m b/d of additional output that markets had been expecting from Gulf countries this year, and the net shortfall over the past two months works out at 12.3m b/d—over 10% of global consumption (see chart 1).
There are three ways to bring markets into balance: spare production capacity can be brought online; stocks can be drawn down to cover any residual gap and prices can rise to suppress demand.
The first option, however, is itself hamstrung by the strait’s closure.
Saudi and Emirati surplus capacity—long the market’s main buffer—sits behind the blockade.
America’s shale producers, usually the quickest to respond to rising prices, cannot move fast enough: ramping up output takes 3-6 months and will probably yield just 300,000-700,000 b/d in the first instance.
Nor would it be easy for America to export much more—its pipelines, storage facilities and export terminals are saturated.
“We cannot fit even one more ship,” says a trader.
Russia could theoretically pump another 300,000 b/d, but with its oil infrastructure under sustained attack from Ukrainian drones, it is struggling to maintain its current output.
Almost all the necessary adjustment must therefore come from consumption of stocks or curtailment of demand.
Neither is easy to measure.
Although inventories of crude oil, stored at export terminals, in ships at sea and at refineries, are fairly simple to track, stocks of refined products such as petrol, diesel and kerosene (jet fuel) are dispersed among millions of suppliers and consumers and so are not.
Demand, meanwhile, is typically inferred from data on production, trade and storage rather than measured directly.
Nonetheless, it is clear that rising prices and outright shortages have curbed consumption to a large extent.
Not only is crude more expensive; scarcity in finished fuels, exacerbated by an export ban in China—usually a big regional supplier—has sent the spread between crude and both diesel and jet fuel soaring to $50-80 a barrel, from $15-20 before the war (see chart 2).
Both fuels now cost twice as much in Singapore, Asia’s trading hub, as they did two months ago—and more still in Europe.
Since the war began, the price of petrol at the pump has doubled in Myanmar, risen by 52% in Pakistan, by 50% in the Philippines and by 40% in Nepal.
Experts canvassed by The Economist estimate demand for crude and oil products ran 3m-5m b/d below forecast in April.
Roughly 10-15% of that is borne by the Middle East, where war has hammered economic activity and airline traffic has fallen by two-thirds.
Over half stems from Asia, where the petrochemical industry has swooned.
Naphtha—an oil product processed into plastics and sourced almost exclusively from the Gulf—is in short supply, forcing Asian plants to run at 60-75% capacity.
Some have shut entirely.
East Africa, which is heavily dependent on diesel, gasoline and kerosene from the Gulf, and Eastern Europe account for much of the remaining diminution of demand.
If demand destruction has reached 4m b/d over the past two months—a generous estimate—that means the world has been draining stocks by as much as 8m b/d.
Luckily, near-record volumes of oil were already at sea before the war.
Gulf producers, hearing the drums of conflict, had cranked up exports in the weeks beforehand.
Large volumes of Iranian and Russian oil were also stuck on tankers owing to tightening Western sanctions, since loosened.
Morgan Stanley estimates this floating buffer has provided over 3m b/d since early March.
Clearly, that cannot last.
There are already far less refined products at sea than is normal. Cargoes of seaborne crude appear to be less affected, but that is deceiving, since longer voyages are needed to link Asia to new suppliers in America, Africa and elsewhere.
Large releases from rich countries’ strategic reserves have also helped to maintain supply and are also likely to tail off.
On March 11th the 32 members of the International Energy Agency (IEA), a club of countries that consume lots of oil, agreed to sell 400m barrels from emergency stores—the largest co-ordinated drawdown in the body’s history, equivalent to a third of its members’ total stash.
Some 100m barrels have already reached the market; another 75m may follow in May and June.
But March’s blockbuster announcement was made when the governments of most IEA countries expected Hormuz to reopen within weeks.
Now that Gulf flows may be interrupted indefinitely, they will not want to drain their reserves too rapidly.
The remaining shortfall—close to 5m b/d—is being met from commercial stocks.
Frédéric Lasserre of Gunvor, a commodity-trading firm, estimates that refined products accounted for roughly half that in April.
That is a huge amount: even when demand for oil surged at the height of the post-covid recovery in 2021-22, draws on stocks of both crude and products never exceeded 2.5m b/d for more than a month.
Yet if Hormuz remains closed, and both volumes at sea and releases from strategic reserves dwindle, commercial inventories will have to provide 6m-8m b/d—a pace no one considers sustainable.
“You cannot substitute flows with stocks,” says Amrita Sen of Energy Aspects, a consultancy.
Mr Lasserre, the trader, expects shortages to materialise within 4-8 weeks in most regions.
That implies that prices will soon have to rise even higher to bring demand in line with supply.
There are already signs of desperation.
Another commodities trader says some diesel cargoes are being sold for $600 a barrel, up from $300 a week ago.
Pump it up
The effects will ripple around the world.
Fuel inventories are already rock-bottom across much of east Africa, where kilometre-long queues at petrol stations are common.
Countries like Kenya and Mozambique, down to their last few days of buffers, are living cargo to cargo.
Excluding China, which maintains ample stocks, Asian countries are next.
Their crude inventories have already dropped by 13%, to 545m barrels, according to Kayrros, which tracks stocks using satellites.
Gulf crude—Asian refiners’ preferred feedstock—has vanished, forcing them to slash throughput by 3.5m b/d, or 12%.
Neil Crosby of Sparta Commodities, a data firm, reckons those cuts could double by June if Hormuz stays closed, accelerating fuel shortages.
Indonesia, Pakistan and the Philippines may be five or six weeks from running short of petrol; Australia is just as close to a shortage of diesel and jet fuel.
On the face of it, Latin America, home to several big crude exporters, is better insulated.
But it refines far less than it consumes, so is dependent on imports, mainly from America’s Gulf coast.
Soon enough, predicts Michelle Brouhard of Kpler, a data firm, it may start losing cargoes to Europe, which can afford to pay more.
That will still leave Europe short.
It is not about to run out of crude, owing to vast imports from America and west Africa.
But its refineries are predominantly configured to process crude into petrol rather than diesel and jet fuel—even though European road transport runs overwhelmingly on diesel.
That leaves the continent reliant on imports.
These used to come from Russia; the Gulf and India stepped in after 2022.
Now those sources, too, have dried up.
To compensate, European refiners have converted more crude into kerosene at the expense of other fuels, while ramping up diesel imports from America’s Gulf and east coasts—causing stocks there to fall by 11% in five weeks.
Neither coping mechanism can be sustained.
The more American diesel stocks dwindle, the greater the pressure on the Trump administration to suspend exports.
European refiners will eventually need to restore diesel output, causing kerosene production to wilt.
The IEA has warned that Europe could face jet-fuel shortages by June if it can replace only half its normal Gulf imports.
European airlines are already trimming flights and imposing fuel surcharges.
Diesel and jet-fuel stocks will fall faster still if European governments, hoping to shield voters from the crisis, continue to prop up consumption through subsidies and tax cuts.
That delays the day of reckoning, but may also make it more severe.
Illustration: Carolina MoscosoAmerica itself is not immune.
A big exporter of both crude and oil products, its openness to trade exposes it to global prices.
Petrol already sells for $4.20 a gallon on average, up from just under $3 before March.
That masks sharp regional disparities.
The east coast, America’s most populous region, has little refining capacity of its own and depends on piped flows from refineries on the Gulf of Mexico and imports from Europe.
The west coast, which is not connected to the Gulf by pipeline, relies in part on imports from Asia and the Middle East.
In a crunch, the middle of the country may fare better than the edges.
A crunch is fast approaching.
America is about to enter the summer driving season, which typically brings a sustained increase in demand for petrol.
Another three or four weeks with Hormuz closed, a trader estimates, will push pump prices to $5 a gallon or more—a level last reached in 2022, when it caused a painful reduction in driving and in the popularity of the president of the day, Joe Biden.
Not feeling well
Short of a diplomatic miracle, then, the oil shock will soon have far more visible consequences.
“Something will break,” says Mr Crosby. Prices may leap first for refined products, for which stocks are shallowest.
Eventually, though, this will pull crude prices up, as refineries, keen to maximise profits, look for more raw material.
Governments around the world are sufficiently alarmed that they are taking administrative steps to fend off shortages, while also preparing for the worst.
Common strategies to diminish fuel consumption include encouraging working from home, declaring extra holidays and promoting public transport.
Authorities in Malaysia, the Philippines and Thailand, among other places, have told civil servants to steer clear of the office.
Sri Lanka has instituted a four-day working week, with all Wednesdays considered holidays.
Pakistan is limiting opening hours for shops and restaurants.
Another approach is to limit exports of refined products, to conserve domestic supplies. China, the world’s biggest producer of kerosene, has banned all exports; South Korea, the second-largest, has capped them and India, also a big supplier, has raised taxes to discourage them.
Such restrictions, naturally, make shortages elsewhere more severe.
Australia and New Zealand, for instance, get almost all their jet fuel from China and South Korea.
Trying to boost alternatives to fossil fuels is also popular.
Argentina has raised its cap on the proportion of ethanol that can be mixed into petrol.
Indonesia has done the same with diesel, allowing a blend that is half palm oil.
Lots of countries are expanding subsidies for electric vehicles.
Some governments, however, have already had to resort to more brutal measures.
Indonesia is capping fuel purchases at 50 litres a day and Sri Lanka at 15.
Myanmar is letting drivers buy petrol only every other day.
Cambodia has simply shut a third of petrol stations.
So far the burden of such policies is falling chiefly on the developing world.
But even in Europe, governments are dusting off laws enacted in the 1970s, in the wake of the first big oil shocks, which allow them to meddle in fuel distribution.
The intention is to prevent problems from cascading, as when a lack of fuel for food distribution leads to empty shelves in supermarkets or when emergency services cannot keep their vehicles running.
Some also provide for the suspension of competition rules to permit refineries to work together to maximise supplies or allow governments to alter speed limits to conserve fuel.
The Netherlands recently initiated the first phase of its oil-crisis plan, which mainly involves closer monitoring of stocks.
Slovakia and Slovenia, however, have both capped fuel purchases.
Such contingency planning will seem much less urgent should America and Iran reach an agreement to open the strait.
But even then, it would take some time for the oil market to return to normal.
The strait would need to be cleared of mines; insurers and shipping firms would have to be confident enough to send vessels through it; ships (apart from the ones stuck there) would have to sail to the Gulf, pick up cargoes and then sail on to refineries; refineries would have to process the oil and distributors would have to transport the resulting fuel to petrol stations.
Governments in the rich world could slightly ease the burden during this recovery phase through further releases from strategic reserves, but they would have to be confident the crisis was past.
And that would do little to help poorer, developing countries.
In other words, even in the most optimistic scenario, the world will continue to suffer a severe shortfall in supply for several more months.
One way or another, fuel consumption will be rationed, whether by leaping prices or outright shortages.
The energy shock of the past two months is bound to get bigger before it goes away.
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