When the chief executive of Aramco said earlier this week that years of underinvestment had damaged the balance between supply and demand in the oil market, it should have been a wake-up call to those in decision-making positions. Instead, the secretary-general of the UN bashed the oil industry once again for “feasting” on record-high profits and urged governments to make them pay for this.
Meanwhile, OPEC’s production shortfall last month reached 3.58 million bpd—a figure equal to some 3.5 percent of global demand—and the United States continued to sell oil from its strategic petroleum reserve.
These seemingly unrelated news reports do have something very important in common. Both clearly suggest a supply shortfall on a global level is imminent. Throw in the news that Russia’s oil exports could fall by some 2.4 million bpd after the EU embargo enters into effect in December, and an oil shortage becomes more or less unavoidable.
Oil demand has remained resilient in the face of a multitude of challenges, and even prices of over $100 per barrel failed to curb it in any significant way earlier this year. Now, prices are somewhat tempered, but the embargo is still about two months away. Once this kicks in, prices are bound to jump because alternative supply is limited. And the U.S. will need to start refilling its SPR at some point because it is getting depleted.
The Wall Street Journal sounded the alarm on that problem this week. Author Jinjoo Lee cited the Energy Information Administration as saying the inventory level at the SPR had declined by another 7 million barrels in the week to September 16, meaning the total was 427 million barrels. And this number was the lowest SPR inventory level since 1984. It is also the first time there is less oil in the SPR than in commercial storage, Lee noted.
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Perhaps worse is the fact that the administration has no plans to start replenishing the SPR anytime soon. In a report from earlier this month, the Department of Energy denied a report by Bloomberg that it was waiting for oil prices to dip below $80 per barrel to start refilling the SPR.
This suggests the DoE has no immediate plans to start filling up the SPR, and this is a cause for worry because oil supply shocks tend not to be obvious until they become painfully so. And a supply shock is definitely coming to Europe if the U.S. is not there to help. Add to this the moderate growth in U.S. oil production and statements by industry executives that U.S. won’t be able to bail Europe out with oil or gas, and the situation becomes quite bleak.
Meanwhile, as the EU begins discussions of a price cap on Russian oil, in addition to the embargo, U.S. senators are pushing for increased sanction pressure on the buyers of Russian crude to make sure the other price cap, the one agreed to by the G7, works. If either of these latest efforts ends with a decision to take action, there should be little doubt that Russia will respond just as it said it would respond: no oil sales for price cappers. And this means even less oil to go around.
It seems many in positions of power are oblivious to this threat. In fact, in a congressional hearing this week, Rep. Rashida Tlaib asked the heads of the biggest U.S. banks whether they had already devised a strategy for exiting oil and gas investments as a whole. The question suggests that the latest supply and demand—and price—developments have escaped Rep. Tlaib’s attention just like they have escaped Antonio Guterres’ attention.
The answer that JP Morgan’s Jamie Dimon gave to Rep. Tlaib’s question at the Wednesday hearing, however, is one for the books. “That would be the road to hell for America,” Dimon said in what is perhaps the bluntest assertion yet that economies run on oil and gas, and they will continue to run on oil and gas for many more decades, whatever direction the energy transition takes.
The evidence is right there under all our noses: Europe. For all its efforts to convert to the lowest emitter in the world—which it did for a while—Europe thrived not on cheap solar and wind but on cheap gas and abundant oil. Now that these are gone, European economies are beginning to fall apart.
Avoiding a supply shock in oil would be difficult in the current circumstances. The OPEC+ shortfall is not all a result of conscious action. In fact, most of it is not, and this means it would be almost impossible to make up for. And the U.S. can’t afford to continue drawing on its SPR for much longer without doing something in the replenishment department. It’s called strategic for a reason, after all.