The World is Running Out of Fuel

Ryan Knutson (0:05)

Since the war in Iran has been going on, oil prices have been going up. But they actually haven't gone up as much as people thought.

How high are oil prices right now?

Benoît Morenne (0:18)

They are high.

But they could be higher. And something that's been stunning to a lot of people is, why isn't it higher based on what's happening and the extent of the disruption?

Ryan Knutson (0:29)

That's our colleague Benoît Morenne, who covers the oil industry.

Benoît Morenne (0:33)

You know, for most of the year, people are like, oh, we're going to drive off the cliff. And then we're like, oh, actually, wheels are still on the ground. We're okay. It could be worse.

Ryan Knutson (0:41)

For the last few months, the world has found workarounds to keep the worst-case scenario at bay by doing things like tapping strategic reserves or releasing sanctioned oil. But now, it's starting to look like the world is running out of those band-aids.

And oil executives are ringing the alarm that prices are about to go up.

Benoît Morenne (1:00)

We've bought time for the past six months, and now time has finally run out. All those solutions are finally gone. And people are again talking about, oh, we're going to be potentially hitting tank bottoms, which is when crude levels are so low in tanks that you literally cannot pull it out.

Ryan Knutson (1:22)

I mean, this sounds bad.

Benoît Morenne (1:24)

It is pretty bad. It is pretty bad. And I was at a conference just a couple of weeks ago, and when I was running into a CEO that I knew, or an analyst, I asked them, is this it? Like, is this the turning point? Is this the inflection point?

Is this the driving of the cliff? And everyone said, yep, this is, yes, this is it.

Ryan Knutson (1:46)

Welcome to The Journal, our show about money, business and power. I'm Ryan Knutson. It's Monday, September 21st.

Coming up on the show, the fuel crisis is finally here.

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Ryan Knutson (2:48)

When Iran shut down the Strait of Hormuz at the start of the war, it prevented about 20% of the world's oil from reaching the market.

Benoît Morenne (2:55)

It's supremely important, and it was known that if Iranians, for some reason, decided to shut down the strait, this would have massive ramifications for the global economy. You know, when Trump administration struck some of those Iranian sites, people were like, oh, what if Iran decides to close the strait? But it was really seen as the nuclear option, one that no one wanted to see, because it would be so bad for everyone involved.

Ryan Knutson (3:21)

As soon as the strait was closed, oil prices shot up. They rose from around $70 a barrel to well over $100. But soon, markets found a number of workarounds that stabilized prices.

First, the US government tapped into what's known as strategic petroleum reserves, massive storage sites filled with backup oil that the US has held on to for decades, just in case.

Benoît Morenne (3:45)

That's been in place since the after the Arab oil embargo of the 1970s. And as a result of that, the US decided that it would be a really good thing to have a bunch of crude stored up in salt caverns on the Gulf Coast that you could tap into if something like that was to happen again.

Ryan Knutson (4:03)

And it's not just countries that have oil reserves like this. I understand companies have them too.

Benoît Morenne (4:07)

You have commercial stocks as well, right? And those are something that, you know, refiners can tap into and those levels were really high going into the conflict. So people could look at it and say, okay, we have good buffers.

Ryan Knutson (4:23)

When the US government and companies tapped into those reserves earlier this year, it helped slow the rise of oil prices.

Benoît Morenne (4:29)

Traders and, you know, Alice looked at and said, okay, that's good. We have like a response.

We have one buffer. It's not going to be enough to see us through this crisis if it goes on for too long, but provided that it is short, as the administration is saying, we will be maybe okay. We're going to have a glut of oil this year, so hopefully we're not going to be, you know, hitting tank bottoms, right? We'll have enough to see us through this.