The International Energy Agency’s decision to trigger the largest-ever release of oil reserves in response to the Iran war’s impact on global fuel supplies is a palliative step, not a remedy.
On Wednesday, the IEA said its 32 member states would release 400 million barrels of oil from their strategic reserves, about a third of the 1.2 billion barrels they hold in storage. There’s potentially a further 600 million barrels that oil companies are obligated by their governments to hold, which could also be tapped.
The release, which is more than twice the 182 million barrels IEA members released from their stocks after Russia’s invasion of Ukraine in 2022, is an attempt to counter the disruption to supply and the spikes in oil prices caused by the US-Israeli attack on Iran and the effective closure of the Strait of Hormuz, through which about 20 per cent of the world’s oil is shipped.
But releasing the reserves, even if the IEA members were to unlock even more of them, isn’t an instant or permanent solution to the disruption in the oil market caused by the war. It could take several weeks before that oil actually reaches the market.
For instance, the US, in theory, is capable of releasing about 4.4 million barrels a day from its strategic reserve of about 415 million barrels, but the US Energy Department has calculated it can release less than half that amount about 13 days after the president gives the order.
Even after the oil is delivered, it would amount to, at best, about 20 days worth of the volumes normally shipped through the strait.
It is apparent that the Trump administration didn’t plan for a prolonged closure of the strait (or a prolonged conflict, for that matter).
That can buy some time and, perhaps put a ceiling on oil prices – although they rose further after the announcement, perhaps because the IEA’s action indicates an expectation that the war won’t be the “short-term excursion” that Donald Trump claimed it to be this week — but the market can’t even begin to normalise until the strait is reopened.
The Saudis and the United Arab Emirates do have two pipelines that bypass the strait to reach terminals on the Red Sea.
The Saudis’ pipeline has a capacity of about 5 million barrels a day, which could be expanded to perhaps 7 million barrels, and the UAE’s pipeline can carry about 2 million barrels a day.
Iran has, however, been targeting their terminals, along with other oil industry infrastructure in the region including storage facilities. The pipelines and terminals are obvious targets.
With storage facilities full, production is being shut in across the Middle East. It would take weeks, if not months, to re-open the facilities and ramp that production back up to pre-war levels, assuming there is an end to the war and the strait does reopen.
It is apparent that the Trump administration didn’t plan for a prolonged closure of the strait (or a prolonged conflict, for that matter).
While Trump has told the tanker fleet stranded outside the strait to “show some guts,” shipowners and oil traders, who’ve seen the cost of insuring their vessels and cargoes soar from 0.2 per cent of their value to as much as 2 per cent, aren’t prepared to run that risk.
The US is scrambling to try to provide US-underwritten insurance and has talked about sending a naval escort for tankers through the strait, but neither of those are yet in place and only a handful of ships has braved a passage where three commercial ships have already been hit by the Iranians and there are reports of mines being laid.
The sensitivity of oil prices, and financial markets generally, to the status of the strait was demonstrated earlier this week when the price dropped sharply, below $US80 a barrel, in response to a social media post on Tuesday by the US Energy Secretary, Chris Wright, that the US navy had “successfully escorted” a tanker through the strait.
The post was quickly deleted because it wasn’t true – no tanker had been escorted through the strait by the navy – and the price instantly bounced back up towards the $US90-plus a barrel it currently trades at.
That oil prices haven’t remained above $US100 a barrel (they peaked on Monday at just under $US120 a barrel) probably relates to a conviction that Trump’s sensitivity to financial markets and US petrol prices (which have risen from less than $US3 a gallon to more than $US3.50 a gallon in a week) will cause him to end it soon, regardless of whether the US has achieved any of its objectives.
His comments this week, in which he labelled the attack as a “little excursion” and said it was “very complete, pretty much” were greeted by the markets as an indicator that the “TACO trade” – short for Trump always chickens out – is alive again. The oil prices responded to his comments, although a statement by Secretary of War Pete Hegseth that “this is just the beginning” undercut the message.
In fact, it appears the US administration is trying to rewrite its objectives for the war on the run, with Trump and a number of his senior cabinet secretaries now focusing on the aerial successes – the destruction of Iran’s missile and drone launching sites and weapons manufacturing facilities – with regime change and the securing of Iran’s stockpiles of weapons-grade nuclear material quietly dropping out of their updates on the war.
Apart from the aerial assault, which appears to have been extremely successful, it doesn’t appear that the administration developed any meaningful plans for following up that bombardment.
Yes, it decapitated Iran’s leadership, but Iran replaced it so quickly that it clearly had pre-planned its response. The US and Israel have gutted Iran’s military installations, but missiles and drones are still being launched.
More particularly, Iran’s spreading of the conflict throughout the region, and the impact that has had on global commerce, clearly caught the US unprepared.
It’s not just oil. The shutting in of Qatar’s LNG Ras Laffan processing facility – by far the world’s largest LNG plant – after Iranian attacks has taken about 20 per cent of the world’s LNG off the market. Gas prices are soaring.
The Middle East is a critical global aviation hub for both passengers and cargoes. The war is causing chaos for the airlines, passengers and freight that fly via Dubai and Doha.
About 20 per cent of the world’ fertilisers passes through the strait, nearly 10 per cent of its aluminium and half the seaborne trade in sulphur (used in fertilisers, chemicals, petroleum and critical minerals refining) have been affected.
Massive disruptions to the supply chains of those products are occurring, along with the resulting price spikes. Those will, combined with the oil market disruption, flow through to product shortages and price increases for corporate customers and their end-consumers. Globally, inflation and interest rates will rise relative to what they might otherwise have been.
There’s no winning strategy for the US, unless it is prepared to put boots on the ground – and risk far heavier casualties – to effect real regime change and seize Iran’s enriched uranium stocks.
America can exit, with Trump claiming a Pyrrhic victory, but the current regime will still be there, with the newly acquired knowledge that it can paralyse global trade and inflict global economic damage by threatening the strait.
Iran can rebuild its military capabilities and create nuclear weapons, but this conflict has demonstrated it doesn’t need a nuclear armoury to have enormous leverage over the rest of the world, including the US.
Trump and his advisers have underestimated Iran, the resolve of a regime facing an existential threat and its potential to wage an asymmetric war. The global economy is paying the price for it.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
