EARLIER this week, the Department of Energy and the Maharlika Investment Fund announced that they were cooperating on the development of a strategic petroleum reserve for the Philippines. It is an objective that was mentioned early on in the current energy crisis, but until now there has not been any indication of serious work on it. According to the news reports, the project is being supported by technical assistance with Japan, and seeks to establish an “initial” stockpile of 2 million barrels of oil to be managed by the government-owned Philippine National Oil Co.
Various analyzes that began circulating on Tuesday, however, strongly suggest that it may be too late, and that we are about three months away from an economic collapse of apocalyptic proportions.
These, of course, were in reaction to the latest news indicating that the prospects for ending the war against Iran and its allies by the United States and Israel, or at least de-escalating the situation enough that the critical Strait of Hormuz could be reopened, have taken a turn for the worse. Israel’s intensifying attacks against Lebanon and Gaza caused Iran to break off the indirect negotiations with the US — although the increasingly desperate and unhinged leader of the US claimed otherwise — and again slam the door shut on the critical waterway through which nearly a quarter of the world’s petroleum supplies pass.
The bottom line is, if the Strait of Hormuz does not reopen completely before the end of next month, things are going to start falling apart by September. Let’s walk through how that happens.
The first thing to understand is that even though the crisis has seemed to hit us hard in the form of higher fuel prices — with all the knock-on effects those cause — it has not really been as bad as it could be. So far, it has only been a price issue; though our local fuel inventories measured in days of supply have shrunk slightly, alternate supplies have still been obtainable. Prices even dropped by a considerable amount this week, although they are still significantly higher than they were before the war started on Feb. 28.
Those supplies come from oil reserves around the world, built up over years, and particularly in the last four years since the beginning of the Ukraine war reminded everyone of the fragile nature of global petroleum supplies. The problem is, the world has been burning through those reserves at a furious pace to keep supplies moving and keep fuel prices from absolutely exploding, drawing them down at a rate faster than during the Covid-19 pandemic. Even then, the situation stabilized within a matter of a couple of weeks; it has been three months and counting this time around.
An advisory I received in my inbox on Wednesday from Oxford Economics put some numbers to the situation, which helps to visualize what is happening. As of April, a net of about 14 million barrels per day (bpd) of oil that would usually flow through the Strait of Hormuz was cut off from the market, after accounting for supply rerouted through bypass pipelines. Supply from other producers and a preexisting oil surplus reduced the effective supply loss around to 10 million bpd, while the higher fuel prices cut demand by approximately 3 million bpd. Oxford Economics calculated that this leaves a supply gap of about 5.7 million bpd, which is being made up through drawdowns of reserves and commercial inventories. At least for now.
As I’ve explained before, any “reserve” of petroleum products, whether crude oil or refined fuels, is not a static stockpile, because all petroleum products are organic compounds that will decay, mostly through oxidization. Crude oil can last for several years; something like diesel or gasoline is only good in storage for perhaps six to eight months before it goes sour and cannot be used. So, it has to be constantly replenished, and the time limit on that, which is called the operational floor, is determined both by engineering and economics. It varies a bit from region to region, but the figure for the Organization for Economic Co-operation and Development nations collectively is generally used as a benchmark, which is 52 days.
Fifty-two days from today is July 26, but in reality, that clock has already started ticking. For Oxford Economics’ part — and I saw a similar estimate from the UN Conference on Trade and Development — time runs out sometime in September. A steep drop in demand, something which is entirely possible if oil prices begin to rise sharply again, may push that back to as late as December.
This is not a fringe doom scenario. In a dispatch posted to its website back on April 21, the Atlantic Council called the current disruption “without precedent,” and warned that strategic reserves “are no match for massive, sustained production outages.” Even at that point, with the optimistic view that the Strait of Hormuz would have been opened by the end of April, the Atlantic Council estimated it would take 1.8 million bpd over baseline demand for an entire year to replenish run-down stockpiles, keeping oil prices elevated well into 2027. The situation has only worsened since then.
So what happens if the clock runs out? Feel free to use your imagination, but whatever we can imagine, the reality will probably be worse. Goods and people can’t move, because fuel supplies aren’t available; and when they are, they are prohibitively costly. Agricultural production shrinks to a fraction of its current level. The production of many vital nonagricultural goods we take for granted is curtailed as well. Skyrocketing inflation. Job losses. Economic contraction on a scale likely not seen since the Great Depression.
The caveat, of course, is that this could be avoided. The diplomatic twists and turns in this war have been erratic and unpredictable, and who knows what will happen tomorrow. Oxford Economics is of the view that hitting the petroleum supply wall in September will force the reopening of the Strait of Hormuz, one way or another, and that is certainly a possibility. But it is equally possible that we are in for some very dark days indeed.
ben.kritz@manilatimes.net
Bluesky: @benkritz.bsky.social
Website: www.badmannersgunclub.com
