Iran war: How big is the global energy shock? — Counting the Cost

[0:14] Hey there, I'm Scott McClain. This is Counting the Cost on Al Jazeera, your look at the world [0:17] of business and economics. What's being called the world's biggest ever energy crisis. The Iran [0:23] war is tightening supply and may crush demand pretty soon. But how much oil has actually been [0:28] taken off the market? Is the crude lost or supply chains maybe just being redirected? [0:34] The Iran war has sent energy prices higher. So far, the price of oil has hovered around $100 a [0:40] barrel. How high could it go if the conflict drags on and the Strait of Hormuz remains [0:46] disrupted? And what does this mean for people like you and I? Top international organizations [0:51] are warning that no nation will be spared the fallout from the Iran conflict. So is the global [0:56] economy sleepwalking into a recession? Well, at the petrol pump in America, the price just crossed [1:08] $4 per gallon. In Europe, some factories are facing energy rationing. And the impact of the supply [1:15] crunch is being felt across major emerging economies like Brazil and China. It all points back to one [1:21] crisis. In just 50 days, the Iran war has wiped out $50 billion worth of oil production. Analysts say [1:29] that's equal to almost the entire economies of nations like Latvia or Estonia. The International [1:35] Energy Agency says it is the largest energy crisis the world has ever experienced. But while no country [1:41] will be spared, the burden, of course, will not be shared equally. The poorest will suffer the most. [1:47] So how much oil has truly gone off the market? Well, Fenton Monaghan reports now. [1:53] The Iran war has disrupted one of the world's most vital shipping lanes. 20% of the world's oil and gas [1:59] supply has been prevented from passing through the Strait of Hormuz. Analysts say more than 500 million [2:05] barrels of crude oil have been knocked out of global supply since the crisis began. That's equivalent to [2:10] what the global aviation industry uses in 10 weeks. Or what all the road vehicles in the world use in 11 [2:16] days. But even if the Strait fully opened again, things won't return to normal in an instant. [2:23] Tanker ships have been redeployed, with some of them being redirected to carry fuel from the U.S. to [2:28] Asia. Rebalancing the global fleet could take as long as 12 weeks. Many oil and gas fields in the [2:35] Gulf have shut down, and restarting them will take time. Some could be up and running in two weeks, [2:40] but others could take months. The International Energy Agency says more than 80 Gulf energy [2:46] facilities have been damaged in the conflict and will need to be repaired. That includes Qatar's [2:51] Raslefan LNG hub, which lost around 17% of its capacity. These will take years to repair. [2:58] The loss of supply has pushed up oil prices, which is having a knock-on effect on demand. [3:03] The IEA expects oil demand to shrink by 80,000 barrels a day this year, which could suggest a [3:09] reduction in economic activity. The war has also caused the International Monetary Fund to downgrade [3:15] its global growth forecast from 3.4% to 3.1%. It's also expecting higher inflation, 4.4%, [3:23] up 0.6% from earlier estimates. But the pain will be felt the most in developing countries that are [3:30] heavily reliant on imported energy. Many parts of Africa are already experiencing fuel shortages. [3:36] And countries that are already struggling could find themselves pushed into crisis. [3:41] Vinton Monaghan, Al Jazeera, for Counting the Cost. [3:44] Well, the world has dealt with severe oil shocks in the past. A series of energy crises in the 1970s, [3:51] including the Iranian revolution, sent oil prices soaring. In 1979, Brent crude hit a peak of what [3:57] would be the equivalent of $178 in today's money. In 2022, Russia's invasion of Ukraine caused oil prices [4:04] to rocket past $130 adjusted for inflation. During the current crisis, Brent crude prices peaked at [4:11] around $120 per barrel. They've been averaging around $100 since the war began. Many analysts are saying [4:19] that if the war drags on, $200 a barrel is a very real possibility. Now, it's also worth noting that the [4:26] current crisis is broader, taking in not just oil, of course, but LNG and other key inputs. [4:31] The head of the International Energy Agency says this is a global problem and every country will [4:37] suffer the consequences. Listen. [4:40] The world is facing the greatest energy security challenge in the history. It is oil, it is natural gas, [4:51] but it is also other vital commodities such as fertilizers, petrochemicals, helium and others. [4:56] The scale of the problem is huge, and countries will suffer under this. Some more than the others, but I can tell you, [5:09] no country, but no country is immune to this problem. [5:15] Now, among the major economies, the United States is one of the most insulated from this crisis. [5:20] While the IMF cut growth expectations for many countries, the U.S. was an exception. [5:24] The new outlook for this year is now 2.3 percent. That's down just a tenth of a percentage point. [5:32] The U.S. is the world's largest producer of crude oil and is not reliant on supplies from the Strait [5:37] of Hormuz. This gives it a cushion against shortages. U.S. energy companies are expected to gain a windfall [5:45] of billions of dollars due to the higher margins. Oil exports have topped 5.2 billion barrels per day, [5:51] the highest in seven months. Meanwhile, imports are down by more than a million. [5:57] But despite all this, American consumers are still feeling the pain of higher petrol costs. [6:01] Prices up around 35 percent since the Iran war began. [6:06] All right, let's discuss this further with our panelists from Paris. [6:09] We're joined by Neil Atkinson. He is a visiting fellow at the National Center for Energy Analytics [6:14] in Washington, D.C. and the former head of Oil Industry and Markets Division at the IEA. [6:20] Naveen Das is in London. He's a senior crude oil analyst at Kepler. [6:25] And also in London, we're joined by Mark Ostwald. He is the chief economist and global strategist [6:30] at ADM Investor Services International. Thank you all for being on the program today. [6:35] Neil, we will start with you. Throughout the course of this conflict, we are down now by [6:40] 500 million barrels of oil because of the closure of the Strait of Hormuz. [6:45] Have we reached the peak of this or is it still going to get worse? [6:48] Well, I think the actual figure today is actually significantly higher than 500 million barrels. [6:54] There are estimates out there of up to a billion and other estimates of round about 800 million. [6:59] And intuitively, I think the 500 million barrel is an underestimate. [7:03] And the key to this is that at the moment, there is no end in sight. [7:08] Nobody knows how long this conflict is going to last. [7:12] That seems at the moment to be no way out. [7:16] And, you know, the Strait of Hormuz is not operating as normal. [7:20] There is no signs of it operating as normal. [7:23] As long as that remains the case, then the crisis will persist. [7:26] And all of this data that you have just used in your introduction piece, [7:31] whether it be economic outlook from the IMF, expectations for lower demand growth, [7:36] all of those numbers are snapshots taken just in the last few days or the last couple of weeks. [7:42] And unless nothing changes, the next snapshot that the IEA takes and the World Bank or the IMF takes [7:48] will be for worse numbers. [7:50] There's no question of this. [7:52] I believe that the worst is still, unfortunately, yet to come. [7:56] Naveen, help me understand. [7:57] The International Energy Agency, it has 32 member countries. [8:00] And back in March, they all agreed collectively to release some 400 million barrels of oil [8:06] from their stockpiles, from their strategic reserves. [8:09] So 500 million barrels down, 400 million taken out of reserves. [8:14] What am I missing here? [8:15] Are they just not coming online quickly enough? [8:17] Or is Neil right that we're actually vastly underestimating the scale of the loss here? [8:22] Yeah, so first and foremost, I would agree with Neil as well. [8:26] I think 500 million barrels is definitely an underestimate now. [8:30] You know, at Kepler, we are well above the 600 million barrel mark, [8:34] I'd say closer to approaching that 700, 800 million barrel mark. [8:38] So that's the first point in time. [8:40] And the other key part of this equation is of those 400 million barrels, [8:44] not all of it is necessarily crude oil. [8:46] It is split also by product. [8:48] And the crucial, I guess, part of the math series is the flow rate, [8:52] the logistics of bringing that SPR crude to market, [8:55] where is it coming into market, and what flow rate is it reaching the market? [8:59] So if we kind of look at it on a sort of a million barrels per day basis, [9:05] that's where the real system breaks down, really, in terms of, you know, [9:10] peak flow rates for SPRs. [9:11] We're looking maybe just above the 2 million barrel per day mark. [9:14] The amount of production lost, not even just shut in, [9:18] but lost from the Middle East now is above 12 million barrels per day. [9:21] So I'm in agreement with Neil that, you know, [9:23] the worst is probably still ahead of us, [9:26] because the maths really just doesn't align. [9:28] Why hasn't it been worse already, Naveen? [9:31] Because, you know, following Russia's full-scale invasion of Ukraine in 2022, [9:36] the prices hit $130 a barrel. [9:38] Shouldn't we be somewhere around there or worse by now? [9:42] Well, I think there's definitely different parts to this equation. [9:44] I think, you know, in physical markets. [9:46] So, you know, we usually quote, you know, prices of, you know, [9:49] high-spread futures or WTI futures. [9:52] You know, futures markets are still pricing in a high degree, I suppose, [9:56] of optimism in terms of, you know, the economics of the situation. [9:59] As you mentioned, the worst energy crisis ever. [10:02] The economics will surely be a solver. [10:04] As the weeks progress, you know, it shows that war is not, you know, [10:08] does not necessarily care about the economics. [10:10] So there's still a degree of optimism baked in the futures prices. [10:13] Physical oil prices, though, you know, have seen, you know, [10:17] a big divergence from what the financial prices have been showing as well. [10:22] You know, much higher prices for the end consumer. [10:25] You know, prices even on a delivered basis, for example, to Sri Lanka, [10:29] you know, above the $250 mark. [10:31] So there is this divergence. [10:34] And I think also the scale of this is so great and, you know, [10:39] so almost incomprehensible that the market is looking to, you know, [10:43] the solvers and demand destruction and the destruction of global economic growth [10:48] is one of those factors. [10:49] And that's maybe also pricing in to further ahead in the financial market. [10:55] I mean, it's your job to comprehend all this. [10:56] And if you're struggling to comprehend it, [10:58] then maybe we should be a little bit more worried on this side. [11:01] Mark, the International Monetary Fund predicts that the longer this war drags on [11:05] and that the worse it's going to get, obviously. [11:08] And in the worst case scenario, [11:10] we could be on the brink of a global economic recession. [11:12] Do you agree with the IMF? [11:14] Yeah, I don't think that's unreasonable. [11:17] You know, it's their adverse scenario, [11:20] which is basically assuming that we have oil prices above $100 on a sustained basis. [11:26] And basically, it doesn't matter whether there is a ceasefire or not in that scenario. [11:33] It's just the fact of that. [11:34] That will create a lot of demand destruction. [11:37] Energy is obviously a critical part of every economy in the whole of the world. [11:42] So, basically, it points to recessionary risks. [11:47] The important part is it is going to be very differentiated. [11:51] Europe is probably the most vulnerable because it already has the weakest growth prospects. [11:58] Asia, but the real threat actually comes from Asia, which is the engine of the global economy. [12:04] Yeah, so let's talk about Europe for a second. [12:06] So, Dan Jorgensen, the EU Energy Commissioner, described the scale of the problem like this. [12:12] Listen. [12:13] This is not a short-term, small increase in prices. [12:22] This is a crisis that is probably as serious as the 1973 and the 2022 crisis combined. [12:34] And this means that we are looking into some very difficult months or maybe even years, [12:45] depending, of course, on the development in the Middle East. [12:48] But even in a best-case scenario, it's still bad. [12:52] So, just for our viewers to understand, 1973 refers to the Yom Kippur War, [12:57] where Arab members of OPEC cut production and then cut off sales to the United States and some other countries. [13:03] The price of a barrel of oil quadrupled during that time. [13:07] Obviously, 2022 refers to the Russian invasion of Ukraine. [13:10] Dan Jorgensen is saying that this current situation is worse than both of those combined. [13:16] Neil, is he being dramatic or is it really that bad? [13:19] Well, we need to remember that 1973 was a very different world. [13:23] We were hugely reliant on oil, for example, in power generation in many countries around the world. [13:29] We no longer are today. [13:31] And by modern, by today's standards, things like fuel efficiency standards for vehicles in 1973 were very low compared to where we are today. [13:40] So, the world got a giant wake-up call in 1973. [13:44] And over the following couple of decades, maybe longer, it's adapted. [13:48] So, 2022, yes, there was a massive shock to the system when Russia invaded Ukraine. [13:54] But over time, the market adapted and Russia's exports, far from being shut out of global markets, which was feared to be the case initially, were just redirected instead to China and India. [14:06] So, the market settled down. [14:08] What we're faced with here in 2026 is at the moment, as I said before, there is no end in sight. [14:16] This is the problem. [14:17] There is no end in sight. [14:18] And there's only so much redirection can be done. [14:21] For example, Saudi Arabia sending oil across to, via pipeline to Yambou. [14:28] There's various other measures, more oil going to Fujairah, for example. [14:32] There's only so much redirection that can be done. [14:35] To all intents and purposes, the production is lost. [14:39] And unless it's regained, unless there is some kind of end to this conflict, which doesn't look imminent, the situation will get worse. [14:48] So, yes, Dan Jorgensen, I guess, is right. [14:50] 1973 plus 2022 in 2026 is worse. [14:55] Wow. [14:56] Naveen, for decades, OPEC and more recently OPEC Plus have really been able to have a huge role in setting global oil prices, [15:04] deciding collectively to either cut production, boost production to raise or lower prices, basically as they see fit. [15:10] But if you look at the member countries of OPEC Plus, almost a third of them rely in some way, shape or form on the Strait of Hormuz. [15:19] Does OPEC Plus still have the power to dictate prices that it once did, or at least it did before this war started? [15:26] Well, again, it really does remain to be seen what happens, you know, as the conflict progresses and what happens in a post-war world as well. [15:35] You know, the point that you raise is the critical one, which is, you know, if you can't get your barrels to market in the way you're used to, your power greatly diminishes. [15:45] And again, I think what we've seen through the 50-some days of this war is that within the Middle East, the keys essentially to exporting your oil, you know, is being held by Iran. [15:59] And I think even, you know, mentions of this potential toll mechanism or, you know, any sort of redirection of shipping lanes we've seen, you know, fundamentally changes the nature and the power dynamics within OPEC, whereby, you know, Iran has a greater say. [16:14] So, you know, who knows, as you say, you know, how this progresses, but, you know, with the status quo and how with no real end in sight, it does, especially in the short term, diminish OPEC Plus's power. [16:28] And just a quick point to that, I think prior to this war, the strategy from OPEC Plus was to, you know, keep bringing back barrels to the market so as to make their spare capacity, you know, quite transparent and quite low, which then in the future gives them leverage over supply shocks. [16:43] But this type of supply shock materially impacts their power. [16:48] Mark, I wonder, you know, in the slightly longer run, maybe the medium term, I wonder if this is really a matter of shortages or just a reshuffling of where the oil is actually coming from, [16:58] because President Trump has made a lot of hay about the fact that, in his telling of it at least, a lot of oil tankers are on their way to the Gulf of Mexico or Gulf of America, as he calls it, [17:08] or to the U.S. coast to fill up on oil because America has a lot of it. [17:14] So does that just mean that the world's going to have enough oil? [17:17] It's just going to be getting more of it from North America? [17:19] I think it's more nuanced than that. [17:22] I think in the short term, yes, people, you know, desperate people just go to the easiest source of supply. [17:30] The U.S. is definitely that easier source of supply. [17:34] It does come with extra costs. [17:36] In the longer term, I think a lot of people will be looking at other alternatives. [17:43] There are a lot of people who will have been, a lot of countries, particularly within Asia, Africa, Middle East, [17:48] who will be upset at the way that the U.S. and Israel have conducted this war and will actually think, [17:55] well, maybe we should go to Canada, Brazil, Guyana, Australia, mainly for gas, and look for alternatives. [18:03] So it will reshape supply in the longer run. [18:08] How that exactly lands really, well, to a large extent, will depend on China and Europe to some extent. [18:18] China simply because it will look at the vulnerabilities and, you know, [18:22] look to make investments that ensure its security of supply. [18:27] China was the country which went into this crisis with its eyes wide open. [18:33] It had been aware for quite some time and prepared for this type of event. [18:38] But that still doesn't mean that we are, you know, I think the other thing, probably more importantly, [18:46] is as Neil was talking about in 1973, you know, how energy intensity in global economies have dropped enormously in the meantime. [18:55] This will be a spur for a further innovation of how we use oil, oil products, and gas. [19:02] Yeah, it's an interesting point that you make on China. [19:05] China, by some estimates, has more than six months of oil in reserve. [19:10] It seems like they were almost expecting a situation like this, or at least they're well prepared for it. [19:15] But I just want to ask a little bit more about the situation in North America. [19:18] And I want to show a graph that illustrates the break-even point, the profit point for oil coming from North America. [19:25] So on the left side of your screen, you will see the break-even point for Canadian oil sands oil. [19:31] It's just above $40 per barrel. [19:34] On the right side of your screen is the break-even point for U.S. oil. [19:38] This is for drilling new wells. [19:39] So this is a little above $60, maybe $65 a barrel, depending on which oil basin we're actually talking about. [19:47] So my question is, look, at the early part of this war, the price of oil was $55, $60, $65, somewhere around there in the early part of this year. [19:58] Now it's obviously much higher than this. [20:00] Profitability suddenly looks a lot better. [20:02] So, Neil, are we going to see a situation where just more North American oil comes online because there's going to be a flurry of drilling because it looks so much more attractive, so much more profitable? [20:16] Well, at the price levels we had just before this war started, the expectation was that U.S. oil production this year would not grow by very much, partly because prices were lower. [20:26] But the key issue here is, in fact, there is a greater emphasis these days on returns to shareholders. [20:33] The history of the shale phenomenon in the U.S. over the last 20 years has been burning through shareholders' money. [20:39] And in the last few years, particularly as the bigger companies have taken a greater share of the shale patch, the emphasis has been on giving returns to shareholders. [20:51] And I would think that if I was a company looking to the long-term prospects for U.S. shale oil, I would not be ramping up my investment in the sector enormously on the basis of a geopolitical crisis. [21:07] You know, because it is perfectly feasible to suggest that, okay, at the moment prices are elevated, and even if the war ends very quickly, prices are likely to remain elevated for some time to come. [21:20] But that would not necessarily justify a huge increased investment in shale oil, and the companies will continue to be cautious, and they will continue to prioritize returns to shareholders. [21:32] Yeah, returns to shareholders are doing pretty well these days, considering the bump in price and the newfound profitability. [21:39] Naveen, I wonder if there's just limits to the amount that oil-producing countries like the United States can actually export. [21:45] And I ask because, and you'll know better than I, there's a huge number of ships that are caught right now in the Gulf, unable to pass through the Strait of Hormuz. [21:53] And so I wonder, just from a fundamental logistical point of view, is it really a big deal that you have all those ships, either sitting empty or sitting full of oil, whatever it may be, that those ships are just offline, that the physical infrastructure to move that oil around the world does not exist in the same volumes that it did before? [22:13] Is that a big problem? [22:15] Well, again, the logistics and the supply chain is, you know, a part of the equation that, you know, we don't necessarily think about, you know, at the first instance, when we look at the numbers of this crisis. [22:27] You're right, you know, I think you mentioned at the top of the segment that U.S. exports have been ramping up. [22:33] You know, we've had weeks and days where they've surpassed the sort of 5 million barrel per day mark, you know, fresh records in terms of the loadings. [22:40] But the reality is, is we need to be able to get the fleet to where the oil can be loaded and loaded quickly. [22:49] And that still remains a problem. [22:51] You know, as it stands, you're looking at the amount of oil, let's say, trapped, you know, in the Persian Gulf for now. [22:57] You know, prior to this war, in terms of what we deem to be floating storage, so oil that's on a vessel, you know, idle for sort of seven days, those volumes are sort of negligible. [23:06] So in that region, you know, 3 million barrels, maybe 3 to 5 million barrels per day. [23:13] With this war, we've seen upwards of about 85 to 90 million barrels per day, you know, on idle vessels. [23:19] So those are vessels of varying sizes that have been taken essentially out of the market. [23:24] So it does depend on, you know, sale times, load rates at different ports to determine how quickly the world can react to loading, you know, oil that's not from the Middle East. [23:38] Mark, I wonder who gets hit the hardest by this. [23:40] I just think of sub-Saharan Africa where, you know, a lot of people still don't have access to a reliable source of electricity. [23:47] Obviously, they're not thinking a lot about the price of oil, but they're also getting hammered by fertilizer prices. [23:53] I mean, is Africa where we're going to see the worst of this? [23:57] Africa, Asia, you know, it's come at the wrong time, particularly, you know, the fertilizer price, you know, increase, [24:06] which is basically because fertilizers are our key element. [24:10] The key element is nitrogen. [24:11] That's a byproduct of gas production, just for explanation purposes. [24:16] And, yes, you know, I think everyone's food prices are going to be hit hard. [24:21] Africa, well, that's at a basic level. [24:27] The bigger problem is actually going to be a lot of countries in Europe, to a certain extent in Northeast Asia, [24:35] the Japans and South Koreans have the wherewithal to basically cap local prices [24:40] and then basically pay up and look big, as the expression goes, because and they crowd out South Asian countries, [24:50] which are very vulnerable, Southeast Asian, African countries, the weaker economies in Latin America. [24:56] So, yes, it is the developing world and emerging world which will be hit hardest by this. [25:02] Neil, if this all ended tomorrow, and obviously most people in the world are hoping that it does, [25:09] how quickly do things go back to normal? [25:12] Oh, months. [25:14] Months? [25:15] You mentioned it earlier that the Qatar LNG infrastructure, for example, has been very, very badly hit. [25:21] We've had attacks on refineries in the Middle East. [25:26] I think I noted down 18 refineries in the Middle East have been hit, [25:30] and roughly half of the 5 million barrel a day capacity of those refineries has been shut in. [25:36] We don't know the state of each refinery and how long it would take to put it back to normal operation. [25:43] There's upstream activities, pipeline attacks, storage facility attacks, refinery attacks. [25:48] It's going to take months for everything to return to normal. [25:53] And, of course, there isn't an infinite supply of labor to do all this work. [25:58] I mean, every country in the region, Saudi Arabia, UAE, Iraq, Qatar, Kuwait, [26:03] they're all going to be trying to get work done at roughly the same time, of course, [26:07] and it's going to take a very, very long time. [26:10] I don't think we should underestimate the situation, and it's not going to end tomorrow anyway. [26:15] We know that. [26:16] Yeah, of course, unfortunately. [26:18] Mark, we'll give the last word to you. [26:20] I wonder when this does end, is there going to be, I mean, [26:24] will things just go back to the way that they were before, [26:26] or is there going to be some kind of lasting impact to all of this? [26:30] I think there is going to be a lasting impact, particularly in terms of gas demand, [26:34] because a lot of people have been thinking of moving from coal to gas in Asia. [26:39] I think the likes of Pakistan and Bangladesh, which are at the moment, you know, looking at that, [26:44] and India to some extent, will be saying, well, is this actually our best thing to pivot to, [26:50] or should we be investing more in renewables? [26:53] And there will definitely be an impact there. [26:56] But I think the other one is this improvement in efficiencies. [27:00] There have already been remarkable ones, but this will drive that even harder, [27:05] so that we actually get our energy intensity down in production processes, [27:12] particularly if we're looking at all this AI-related demand in the world, [27:17] a lot of which is going to be energy intensive, and we need to reduce the intensity of that. [27:22] Gentlemen, you have painted a very grim picture of the future, [27:26] and I sincerely hope that you are all wrong. [27:29] Thank you all for being here today. We really appreciate it. [27:31] That's Neil Atkinson, Naveen Das, and Mark Ostfalt. [27:36] And that is it for our show. You can get in touch with us on X. [27:38] My handle is at Scott McLean. [27:40] And make sure to use the hashtag AJCTC when you do, [27:43] or you can drop us an email. It's countingthecost at aljazeera.net. [27:47] That's our address. [27:48] And there's more for you online at aljazeera.com slash ctc. [27:51] That'll take you straight to our page, which has individual reports, links, [27:55] and entire episodes for you to catch up on. [27:59] All right, that is it for this edition of Counting the Cost. [28:01] I'm Scott McLean from the whole team here in Doha. [28:03] Thank you so much for joining us. The news is next here on Al Jazeera.