We’re slipping closer and closer to a major oil supply crunch. With the Persian Gulf still shut in, global inventories almost depleted, and threats to other oil supplies, the world doesn’t have enough oil to keep things running for much longer.
The Chinese have been able to substitute some of their oil demands with coal-based products, but this is just a band-aid. Eventually, oil prices will spike, and certain consumers will no longer be able to afford petroleum products, leading to demand destruction.
Northeast Asia will be hit hardest due to its heavy reliance on imported oil, but even Europe will have issues, despite having alternative supply sources.
Hey all, Peter Zeihan here. Coming to you from Colorado. I wanted to give everyone an idea of just when the oil crisis is going to hit, because we’re about their short version is that since the Iran war started, we’ve had somewhere between nine and more, currently about 13 million barrels per day of Persian Gulf crude that isn’t even getting produced, much less exported to the wider world.
And we are well past the point where the last tankers of exports pre-war have reached their destination. So everyone’s just been burning through stocks and at some point in either June or early July, we’re going to reach basically minimum operating levels for inventories and half the world, if not more.
We’re looking already about 1.25 billion barrels of crude that haven’t been delivered. With every day goes by. That’s 10 to 13 million barrels of crude that have to be pulled from inventories. And because prices haven’t dropped, which is kind of weird. Demand really hasn’t dropped all that much. We’ve seen a little bit movement in some subsectors, like say, jet fuel and diesel, but for the most part, people are continuing to consume crude like this isn’t a long term problem.
Oh my god. Anyway, at some point in June or early July, we’re going to hit the wall. The primary reasons why it hasn’t happened already is we’ve got two little factors in play. The first are the strategic reserve releases that the IEA approved two months ago. Now, in the case of the United States, this has really helped out Europe because the United States is a net exporter of crude and refined product by a large margin.
So we don’t need the crude that is being released. So roughly 2 to 2.5 barrels a day of crude from our strategic petroleum reserve are just crossing the Atlantic and helping out the Europeans. And since the Europeans are so much more efficient at energy use than we are, that has really helped them kind of square the circle in the mid-term.
It won’t last much longer, but for now it’s holding on the Asian side. Something else has helped out. That’s a little odd.
When you make petrochemicals, you usually use a mix of feedstocks. You turn oil into something called naphtha. That’s your primary feedstock, but you also use liquefied petroleum gas like ethane and propane and butane. Some of these have partial substitutes, specifically the naphtha.
And what the Chinese are doing is trying to cut out as much naphtha from their system as they can, and instead substitute it with a kind of processed liquefied coal. Now, this is wildly inefficient and expensive and especially polluting. But when you’re in a throughput driven system like the Chinese, it’s not so big of a deal. So headline.
The Chinese petrochemical sector uses about 4 million barrels a day of product, of which about half, maybe a little less, is naphtha. And they’ve been able to substitute coal for maybe a third to half of that which is bought Asia. A little bit of wiggle room and has prevented the Chinese from having runaway price increases. You combine that with their large scale application of very, very, very small electric vehicles and a grid that primarily runs on coal anyway, and they’ve bought some more buffer that way too.
But all of this is going to evaporate over the course of the next 3 to 6 weeks. So we’re very close to the break assuming nothing else goes wrong. And as we have seen in the past, that if we do get into a hot war situation again, the Iranians have easily demonstrated that they can hit any part of the export infrastructure from the Persian Gulf that bypasses the Strait of Hormuz, specifically the bypass pipelines of the United Arab Emirates and the Saudis have so were, ironically, in probably the best that can be hoped for right now.
No hostilities, but the Persian Gulf still closed. If the Persian Gulf were to reopen tomorrow, it would be months before any new crude would flow, because it just takes that long to turn these fields back on and in some cases, years. So the late June and into July deadline is probably going to happen regardless of what happens with the negotiations that are ebbing and flowing back and forth. So get ready for a fun summer.
How this usually happens is when you’ve got this sort of disruption. Prices go through the roof because there just isn’t any throughput. It’s not that people have cut refinery runs for the most part. It’s just that we’re not going to have feedstock. And when that happens, you get this lovely thing called demand destruction, where prices rise to a point that some parts of the economy, some people in some parts of the world simply can’t afford the crude derived products at all.
And when that happens, their demand is destroyed. Till such time as prices fall back into line. The last time the world experienced this scale of disruption, it wasn’t the oil crises in the 70s or the 80s. It was World War two when everything got sunk. So historically unprecedented is the term. And keep in mind that with the global happened, some version of this was going to happen in a large scale.
Regardless, the parts of the world are going to be most affected. At the top of the list is Northeast Asia, because this is an area that imports well over 90% of their crude. And until recently, all of that crude has really come from the Persian Gulf. They do get a little bit of a kicker from the former Soviet Union now, a little bit from the Western Hemisphere, but not enough to make a material difference.
And the second worst will be Europe, where they also import 90% of their crude. But they have the potential of tapping more regions, most notably North America and North Africa and West Africa. So here we go.
