Emergency measures spread to nearly 80 countries as oil stockpiles run low on back of Middle East conflict.
Nearly 80 countries have now introduced emergency measures to protect their economies as the world approaches a new, more dangerous phase in the energy crisis driven by the Iran war.
Governments are stepping up their responses ahead of a looming tipping point, when traders warn that oil prices could jump again sharply unless more fuel trapped in the Gulf can be exported through the blockaded Strait of Hormuz.
Paul Diggle, chief economist at fund manager Aberdeen, said his team was now examining a scenario where Brent crude rockets to $180 a barrel, causing surging inflation and recessions in a host of European and Asian countries.
“We are taking that outcome very seriously,” he told the FT, adding that it was not yet his base case. “We are living on borrowed time.”
Demand for air conditioning and holiday travel at the start of the northern hemisphere’s summer will put further strain on supplies of crude oil, gasoline, diesel and jet fuel, when global stocks are already falling at the fastest rate on record.
Australia has pledged to spend $10bn to boost its fuel and fertiliser stockpiles, while France has said it will “change the scope and scale” of its support to shield its economy from the crisis. India has urged the public not to buy gold or holiday abroad as it tries to shore up its reserves of foreign currency.
The International Energy Agency estimates that the number of countries that have already been forced into emergency measures has reached 76, up from 55 at the end of March.
Economists and traders warn the next phase of the crisis could bring another sharp jump in energy prices, broader fuel rationing, industrial shutdowns and a significant slowdown in global growth.
If the Middle East conflict “does not end in the coming weeks and we don’t have the reopening of the Hormuz strait, I’m afraid a world recession could be on the table”, the EU’s transport commissioner Apostolos Tzitzikostas told an FT conference in Athens on Thursday.
Since the outbreak of the conflict, the world has been existing beyond its energy means.
The IEA estimates that between March and June global oil consumption will run roughly 6mn barrels a day above production. Some analysts believe the shortfall could be closer to 8mn-9mn barrels a day.
To cover the shortfall, traders have drained stockpiles of oil on land and at sea and governments have pledged to release their strategic reserves.
More than 2mn barrels a day of emergency crude from strategic reserves are flowing into the system, but many of those releases are scheduled to end by July.
Global reserves have fallen by nearly 380mn barrels since the war began, the IEA said, excluding the inaccessible stocks trapped inside the Gulf.
Exactly when a crunch point might be reached is difficult to predict.
Most oil reserves, over 3bn barrels, are held by oil companies, traders and refineries, but the majority of this “inventory” is part of the system. Pipelines require minimum volumes to maintain pressure, refineries need continuous supplies and storage tanks cannot be fully drained without risking damage.
Markets would seize up well before inventories hit zero, said analysts.
“The minimum operating level depends by country and by product,” said Paul Horsnell of the Oxford Institute for Energy Studies.
JPMorgan estimates inventories among OECD countries could approach “operational stress levels” by early June.
But much will depend on how aggressively governments, companies and consumers begin rationing.
In most advanced economies, analysts expect crises to manifest primarily through higher prices rather than outright shortages.
While Brent crude is currently trading at more than $105 a barrel, Horsnell said this would not be enough to significantly curb demand.
“This is well short of the all-time high above $140 a barrel that was set 18 years ago. Not very long ago, we thought $90 a barrel was a normal price,” he said.
Across large parts of the developing world, shortages are already apparent.
The IEA said emergency measures introduced in Pakistan, Sri Lanka and the Philippines since the start of the crisis “evoke memories” of the 2022 energy crisis following Russia’s full-scale invasion of Ukraine, a shock that eventually triggered debt crises in several emerging economies. All three countries have introduced temporary four-day working weeks.
So far, however, food prices have not risen as sharply as energy prices, while the unusually strong US dollar that compounded the 2022 crisis for oil-importing countries “is absent now”, the agency noted.
The sectors suffering the most immediate disruption are petrochemicals and aviation.
Kim Fustier, head of European oil and gas research at HSBC, said the “epicentre” of the disruption for consumers was now refined fuels, where inventories were tightening rapidly because refiners were reluctant to buy expensive crude and pay soaring shipping costs.
Instead, many refiners have been drawing down existing stocks while betting on a relatively quick end to the conflict.
For now, many economists are counting on the supply situation to improve soon enough to return crude oil prices below $100 a barrel and to avoid the worst ‘stagflationary’ outcomes of sharply rising inflation and weaker growth.
Analysts at Morgan Stanley, for example, expect global growth to continue on the back of America’s AI-investment boom and firm consumer spending.
But the risks are rising. “An ‘escalation’ scenario — where oil prices surge through $150 a barrel — would mean physical shortages, supply chain disruption, and recessionary outcomes,” they said in a note this week.
