Have markets and governments around the world horribly under-estimated the fallout from the war in Iran? That is the claim made by the president of the International Energy Agency (IEA), Fatih Birol, who says the effect of the closure of the Straits of Hormuz is the equivalent of the 1973 oil crisis and the 2022 gas crisis, provoked by the invasion of Ukraine, combined.
Industrialised nations are not going to stand around shivering. Capitalism, where it is allowed to, will ride to the rescue
The 1973 crisis, he said, removed five million barrels of oil per day from global markets and the Ukraine crisis removed 75 billion cubic metres of natural gas. The current crisis, he says, has removed 11 billion barrels of oil and 140 billion cubic metres of gas. The IEA has started to sound a bit like the World Health Organisation during Covid, calling for government to launch emergency measures, such as lower speed limits on the roads and restrictions on air travel in order to save fuel.
Birol may well be right in that many people have under-estimated the harm that would follow and extended closure of the Straits of Hormuz. There are going to be hard times ahead over the next few months. Inflation will rise, interest rates will remain high, the global economy will be struck. Britain will be especially badly affected as the government is borrowed to the hilt and has voluntarily run down the oil and gas industries which could be protecting us from the worst. Fortunately, this crisis has come at the end of the northern winter, when heating demand is falling. It is not just energy, though, which has been undermined by the present crisis: fertilisers and plastics also rely on crude oil, while helium from Qatar is essential to the production of microchips.
Even so, it is not hard to foresee the reaction to this crisis. Industrialised nations are not going to stand around shivering. Capitalism, where it is allowed to, will ride to the rescue. Oil-producing nations outside the Middle East will up their output in response to higher crude oil prices, helping to counter the loss of the 20 per cent of the world’s oil supply which until recently was flowing through the Straits of Hormuz. More marginal oil reserves will suddenly become more profitable to exploit. Who knows, Keir Starmer may finally discover the guts to over-rule Ed Miliband, whose refusal to issue new licences for the North Sea is being attacked even by green energy entrepreneurs.
Saudi Arabia has already redirected 3.8 million barrels per day of oil production towards ports in the Red Sea, via an existing pipeline which is estimated to have a capacity of seven million barrels per day. It will surely find the means to transport more in this way, perhaps doubling up the pipeline. By comparison, Saudi has in recent years been exporting six million barrels per day through the Straits of Hormuz. It is astonishing how quickly the petrochemical industry can react when it does not have the likes of Miliband standing on its throat; remember how quickly floating liquified natural gas (LNG) terminals were built off the coast of Germany to increase supply after the Ukraine crisis.
Meanwhile, consumers will respond by using less oil and gas. They will not need the IEA or their own governments to do this; price alone will persuade them to use less. Compared with the current moment, by the end of the year we will see increased oil and gas supply and reduced demand. The current surge in oil prices will be seen to be yet one more oil spike – just as the surge in gas prices in 2022 now shows up on graphs as an sharp spike rather than the permanent step-up in prices which many feared at the time.
It is true that oil prices did not rapidly fall after the 1973 crisis; it took a decade for them to fall back to where they had been on the eve of the crisis. But the global economy is much more open and dynamic beast than it was then. The response times of the global petrochemical industry are likely to be rather quickly.
At the end of this crisis, I sense that the world may emerge with a restored faith in global capitalism – as the machine which, once again, has kept us warm and fed.
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