Donald Trump’s options to cool oil prices are sorely limited

ON MARCH 11TH the 32 members of the International Energy Agency (IEA), a club of large oil-consuming countries, agreed to sell 400m barrels of crude from their emergency reserves. The release, equivalent to one-third of the group’s combined strategic stash, is the biggest ever co-ordinated by the IEA, which was founded in 1974 after the first Arab oil embargo. Its historical significance failed to impress oil markets, which have been shaken by the Middle Eastern crisis provoked by America and Israel’s war on Iran. Brent crude, the global benchmark, rose by nearly 10% in the day after the IEA’s announcement, back to $100 or so a barrel (see chart 1).

Traders doubt that Donald Trump can end the war “any time” he wants, as he has claimed. Iran has attacked several tankers and is laying mines in the Strait of Hormuz. On March 11th Israel’s defence minister said the operation would continue “for as long as it takes”. The boss of Saudi Aramco, the world’s oil colossus, has warned of “catastrophic consequences” if the war drags on.

The closure of Hormuz is the biggest shock to global supply in the history of oil. Last year some 15m barrels per day (b/d) of crude, equivalent to 15% of world output, plus another 4m b/d of refined oil products sailed the waterway. A fraction can be redirected via pipelines in Saudi Arabia and the United Arab Emirates (UAE), but that still leaves around 15m b/d of oil and products trapped in the Persian Gulf (see chart 2). Mr Trump says he has “a plan” to keep energy prices contained. What options are available to him and other world leaders?

The immediate fix would be for more tankers to transit the strait. Early on the lack of war-risk coverage looked like a big problem. Many insurers rushed to renegotiate policies. On March 6th America’s International Development Finance Corporation (DFC) earmarked $20bn to reinsure losses suffered by ships in the Gulf, to be renewed when the facility is exhausted. It identified “preferred American insurance partners” to work with shipowners.

One problem with this idea is that American firms may lack expertise in such policies, most of which are underwritten by specialist syndicates in London. The facility also does not cover oil-pollution liability, needed for tankers to enter most ports. JPMorgan Chase, a bank, reckons it would take $352bn to cover all oil tankers trapped in the Gulf—more than the DFC’s maximum permitted liability. And insurance may anyway be less of a problem than Mr Trump makes out. Policies remain available. Although premiums have risen to 1-2% of the value of ships—a three- to six-fold increase on pre-war levels, says Simon Lockwood of WTW, a broker—shipowners can absorb the cost because freight rates from the Gulf to Asia have more than doubled. Ships are not transiting Hormuz for want of insurance but because they do not want to be blown out of the water.

In principle, a military escort could help. Between July 1987 and September 1988, during the Iran-Iraq war, America reflagged dozens of Kuwaiti tankers and escorted them through Hormuz with the help of some 30 warships. Convoys of two or three tankers and several naval vessels departed, on average, once a week. Today, though, a convoy a week would do little to return to pre-war traffic of nearly 50 oil tankers a day. At that rate, it would take two and a half years to get all 320 or so vessels stranded in the Gulf out of there. Even resuming three-quarters of Hormuz sailings would still mean nearly 4m b/d of oil are not getting to global markets. That is far more than analysts feared might be lost when Russia attacked Ukraine in 2022, a shock that sent Brent to $128 a barrel.

To make a real difference, the escort armada must be bigger. But American warships already in the Gulf are involved in the military campaign and reinforcements are weeks away. Jeff Currie of Carlyle, a private-equity firm, says the cost of a single escort would exceed the value of the cargo it is meant to protect. Any ship attempting to shield tankers would also become a target. No escort is watertight; Iranian drones have reached well-protected embassies on land. An oil spill from one hit could impede traffic for months, says John Thompson of Ambrey, a maritime-security firm.

While Hormuz stays shut, governments are seeking alternative oil supplies. The first is those strategic stocks. IEA members’ combined reserves amount to some 1.2bn barrels (see chart 3). Governments can requisition another 600m barrels of industry inventory. All this covers 140 days of their total net imports. The latest joint release is the sixth since the IEA’s creation, including two in 2022 to counter the shock caused by the war in Ukraine. The IEA says the stocks “will be made available to the market over a time frame that is appropriate to the national circumstances of each member country”, suggesting volumes could take some time to get to market. Japan—the IEA member most dependent on Gulf supplies—was the first to confirm it will start releasing barrels next week.

Other details of the IEA’s plan remain scarce. And it is unclear if countries can afford to release much more if needed. Many reserves cannot be drained to the last drop; America’s must keep at least 150m-160m barrels—35-40% of today’s levels—to preserve the stability of the caverns that serve as depots. Releases are also not immediate. In America, it takes two weeks for contracts to be awarded and deliveries to begin once a presidential order is given. Drawdowns are gradual, because of pipeline and other constraints; the IEA’s have never exceeded 1.3m b/d. If all IEA countries liquidated their strategic stocks at their maximum achievable rate, they could add at most 3m b/d to global supply, calculates Martijn Rats of Morgan Stanley, a bank. Going all out also signals an expectation of a prolonged war, prompting traders to bid prices up. On March 11th they rose by 5% after America said it planned to sell off 172m barrels over 120 days.

What of other sources of supply? The fastest way to bring more oil to market is to relax secondary sanctions on Russia, the world’s third-largest producer. On March 5th America granted India a 30-day waiver to buy some of the 140m barrels of Russian crude now at sea, a fifth of it in Indian waters. This helps Indian refiners, which source half their crude from the Gulf. Sumit Ritolia of Kpler, a data firm, reckons India could lift its Russian purchases to 2m b/d, up from about 1m b/d in recent months. Mr Trump has hinted the waiver will remain in place as long as Hormuz is closed. It may be broadened to cover fresh Russian output and other buyers, too.

The Russian solution also has limits, however (beyond the moral ones of propping up President Vladimir Putin’s murderous regime). Unable to procure spare parts and expertise because of sanctions, Russia’s ailing energy industry cannot easily raise output. Prospective buyers would thus be competing for a limited number of barrels. Before long, discounted Urals crude may no longer be much of a bargain.

A less problematic supplier would be America. Its shale producers can crank up output at short notice. The problem is that these days shale firms focus on returning cash to shareholders rather than drill for drilling’s sake. With American production near record highs (see chart 4), they will not invest in new wells until they are confident high prices are here to stay. Even then they could add only up to 300,000 b/d over 6-12 months, estimates Jorge León of Rystad Energy, a consultancy.

Short of ending the war, then, the best-case scenario of realistic releases, with more Russian crude and a bit more American shale, gives just over 4m b/d. That is less than a third of the Hormuz shortfall and would take weeks to materialise. In the meantime, more Gulf producers will run out of room to store their stranded oil. Iraq and Kuwait are already shutting wells, and the UAE and Saudi Arabia are trimming production. Within a few weeks combined cuts could reach 10m b/d—a tenth of global output. Even after Hormuz reopens, restoring idled oilfields to full capacity may take up to six weeks, says a former engineer on a Kuwaiti project.

Wood Mackenzie, a consultancy, warns of Brent at $150 if disruptions persist. Some analysts think it could hit $200. That is because, as economies have become less energy-intensive, and energy production less oil-intensive, the demand that remains—mainly from motorists and airlines—is less responsive to prices. This may make the shock more shocking.

With that in mind, governments are pulling their last lever: protectionism. China has ordered refiners to suspend exports of diesel and petrol, propelling prices for both up. India may follow, and America. It would leave many importing countries in dire straits. The world is anxiously watching the strait that matters most. ■