We have been in the Third Gulf War for a month and what everyone feared has happened: the WTI barrel has broken the $100 barrier. It is normal for panic to spread. Experts get tired of repeating that, if we add inflation, in previous crises things looked worse. Okay, they’re right. But the drama right now isn’t what’s ticking on the quote screen. The problem is that there is no raw physicality. The ships do not arrive, the inventories are emptied and, no matter how much we stretch the numbers, the mathematics of oil has been blown up.
A chasm of 8 million. The reality of the current oil market is summarized in a subtraction that continues to produce negative balances. The closure of the Strait of Hormuz has led to the immediate loss of 20 million barrels per day (b/d) of crude oil and refined products.
So far, the market has managed to absorb this blow, but the accounts are clear and terrifying: after exhausting the first defense shields, the world faces a net deficit of approximately 8 million barrels per day. To put it in perspective, that figure exceeds the combined consumption of Germany, France, the United Kingdom, Italy and Spain.
The mirage of temporary patches. If the world has lost a fifth of its oil and gas supply, why haven’t we seen a total collapse from day one? The answer lies in a series of emergency “patches” that, although effective, have an expiration date.
According to Bloombergthe market has been protected by several layers of cushioning. The first has been the diversion of routes: Saudi Arabia and the United Arab Emirates have been quickly redirected part of its exports through pipelines that bypass Hormuz to exit through the Red Sea and the Gulf of Oman. The second has been the record release of 400 million of barrels of the strategic reserves of the member countries of the International Energy Agency. Furthermore, the United States temporarily lifted sanctions on Russian and Iranian oil that was stored in ships on the high seas, injecting more crude oil into the market.
The efforts are finite. As energy analyst Javier Blas explainsthese joint measures have managed to absorb 60% of the loss of supply (about 12 million barrels per day). But the reserves are empty. As Paola Rodríguez-Masiu, chief analyst at Rystad Energy, warned: “The system has gone from being cushioned to being fragile.”
The black hole is not going to stop, because the escalation does not let up. An Iranian drone recently attacked to the Kuwaiti supertanker Al-Salmi, fully loaded, in the same anchorage area of the port of Dubai, showing that no vessel is safe. Besides, as reported exclusively The Wall Street JournalPresident Donald Trump has told his advisers that he is willing to end the US military campaign without reopening the Strait of Hormuz. The administration assesses that forcing the sea lane to open would extend the military mission beyond its planned time frame of four to six weeks.
We enter “demand destruction.” For Washington, the strait is a bigger problem for Europe and Asia than for the United States. With no new supplies in sight and reserves running out, the market has only one way out, and it is the most painful of all: demand destruction. If there is no oil for everyone, someone has to stop consuming it.
The impact will be brutally uneven. How to analyze Financial Timesdeveloping economies are the first to fall. Unlike advanced economies, which rely more on the service sector, the developing world depends on manufacturing that is highly energy intensive. When prices rise, rich countries simply pay more and hoard available cargoes on the spot market, leaving poorer nations in the dark.
Rationing has already begun. On the Asian continent, the lack of liquefied natural gas (LNG) from the Middle East is forcing machinery to stop. In fact, the blockade has already exploded the myth of LNG as a “bridge fuel”, forcing Asia to burn coal in desperation and resurrect nuclear energy to avoid a large-scale blackout. Pakistan has closed schools to save energy, the Philippines has experimented with shorter work weeks, and across the region, fertilizer, steel and ceramics factories are shutting down their kilns.
But the energy shock will not stay in that part of the world, but it is traveling towards the West. Europe faces an imminent shortage of diesel – the fuel that powers the global economy – in the coming weeks. If the Strait of Hormuz remains closed until the second quarter of the year, oil could skyrocket to $200 per barreltriggering a stagflation shock (high inflation with economic stagnation) not seen since the 1970s.
The final verdict. A month into the crisis, the consensus in the energy industry is terrifying: the world has not yet understood the gravity of what is coming. Government tools to cushion the blow have been exhausted. As Mike Sommers confessedCEO of the American Petroleum Institute: “The playbook is pretty empty right now.”
The crude oil does not flow and the mathematics is exact. There is a shortage of 8 million barrels a day in the world. As Jeff Currie crudely summarizedformer director of Goldman Sachs and current strategist of the Carlyle Group: “The main message is that the energy transition is going to be imposed on us in a very painful way and that it is going to happen very quickly.” That is to say, the leap towards a world without oil will not come in a planned and orderly manner, but rather through blackouts, inflation and the forced closure of industries. There are no longer valid patches; The global market is about to crash into a wall of physical scarcity.
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