Mark Finley analyzes the global energy crisis triggered by Iran's conflict, explaining how Strait of Hormuz disruptions threaten 25% of liquefied natural gas trade despite Saudi diversions via Red Sea pipelines. While crude exports continue at one to two million barrels daily, refined products remain largely bottled up, causing diesel prices to surge nearly $2 per gallon and jet fuel costs to skyrocket. Finley contrasts this unique bottleneck with other choke points, noting that bypasses only handle half the disrupted crude, leaving the U.S. strategic oil reserve and Saudi spare capacity as critical buffers. Ultimately, President Biden's declaration of oil independence underscores the fragility of global supply chains reliant on this singular maritime corridor. [Automatically generated summary]
Joining us now to discuss global energy prices in relation to the conflict in Iran is Rice University Baker Institute's non-resident fellow, Mark Finley.
Mark, thanks so much for being with us this morning.
The headline is: is the golden rule of oil of the oil market is understanding global price dynamics and emerging exceptions.
Now, you wrote that the supply or disruption, supply disruptions, or relief anywhere after prices affect prices everywhere.
What does that mean, and how does it apply to what folks are experiencing now?
unidentified
What it means is that oil is a global marketplace.
And so, even though the United States is the biggest producer of oil in the world and actually produces more than it consumes, we are still vulnerable to prices at the pump going up if something goes wrong somewhere else in the world.
And the reason is because the people, most Persian Gulf supplies that are disrupted by the closure of the Strait of Hormuz go to Asia.
But when Asian buyers can no longer access that supply, they come and compete against our sources of supply.
And so, the prices go up here just like they do everywhere in the world.
Can you talk about which and how which specific sources of energy are being affected by the conflict in Iran that's now entering at six weeks?
And how are they being impacted?
unidentified
So, roughly 20% before the crisis, roughly 20% of the world's oil supplies flowed through that one narrow choke point of the Strait of Hormuz.
And that was oil production and refined products that were produced by refineries in that region, including Iran, Iraq, Saudi Arabia, Kuwait, the United Arab Emirates, and a couple of smaller emirates.
Also, about 25% of the world's liquefied natural gas trade also flowed through the strait.
And so, I think it's what's important is: A, this is by far the biggest disruption of global energy supplies the world has ever seen.
Far bigger than the Arab oil embargo or the Suez crisis or the earlier Gulf Wars.
And it's not just crude oil.
The region is a significant exporter of refined products, as well as I mentioned, natural gas.
And so, what we've seen is that the price of crude oil has gone up, the price of refined products, and especially jet fuel and diesel fuel, have skyrocketed way beyond the price of crude oil.
And the price of traded liquefied natural gas cargoes has also skyrocketed.
Now, I want to ask you, because the president says that the Strait of Hormuz is open unless they shoot it down, they bomb it.
Iran has let some ships go through, specifically those who they have come into an agreement with and that aren't the U.S. and Israel.
How much product is moving through there right now?
Because we know the executive director of the International Energy Agency recently said that the disruption is the greatest threat to global energy security in history.
I know that you said something similar.
How much product is actually moving through there?
unidentified
So, of that original 20 million that was coming out of barrels a day, 20 million barrels a day, Iranian exports have continued unabated.
So, that's maybe one or two million barrels a day.
Saudi Arabia, to its great credit, in the name of energy security, had a backup pipeline that could take a significant share of its crude oil exports away from the Persian Gulf and over to the Red Sea.
So, about 5 million barrels a day have been diverted in that way.
The United Arab Emirates has also built a pipeline that bypasses the strait, and Iraq has been able to get some oil out through Turkey.
So, all told, maybe half of the crude oil that has been disrupted has found other markets.
But that's not the case for refined products, nor is it the case for liquefied natural gas exports.
Those have been essentially bottled up still, other than, as you note, an occasional cargo, say, of propane that Iran lets through to go to India where it's used in restaurants.
Five million, excuse me, five million, five million barrels a day are going through.
Obviously, that's you know, that would leave 15 million here or there.
Are there any other ways in which oil is able to get out of that area, or is it basically stuck?
unidentified
This is the critical choke point for the world's oil system.
And so, it's not like there's been a lot of talk about whether the Houthis in Yemen might close the strait on the other side of the Arabian Peninsula, the Bab el-Mandab.
If they were to try to do that, oil could go through the Suez Canal and a pipeline that follows it.
Other people talk about the Strait of Malacca in East Asia.
Well, that straight you can sail around.
The Hormuz Strait is the one choke point there's no getting around.
And so, other than the options that are bypassing the strait that we discussed a minute ago, there is no other option.
Now, before we continue, Mark, I want to invite more of our callers to join in, or our viewers to join in on the conversation.
Here are your lines.
Republicans, your line is 202-748-8001.
Democrats, your line is 202-748-8000.
Independents, your line is 202-748-8002.
You can also reach us by text message at 202-748-8003.
We are talking about oil and gas in relation to the Iran war.
I wanted to ask you, because we know we heard a few weeks ago that the IEA was releasing barrels, the U.S. release barrels from their strategic tap.
How does that offset what we're seeing blocked in the Strait of Hormuz?
And are we seeing that come as a relief to Americans?
unidentified
Believe it or not, the system for energy security for managing oil is actually a pretty well-developed toolkit here in the United States and with its allies around the world.
So for more than 50 years, the United States and its allies in the International Energy Agency have wargamed disruption scenarios.
They've built up strategic stocks of oil and in some countries refined products like gasoline and diesel fuel.
They have treaties that obligate them to share supplies between each other.
Additionally, as I mentioned, the country of Saudi Arabia, uniquely that I'm aware of in the history of the world, has committed to building a buffer of spare production capacity also to be used in times of emergency.
So that energy security system that has been built up over the last 50 years is being severely tested right now.