When Aramco’s chief executive said earlier this week that years of underinvestment had damaged the balance between supply and demand in the oil market, that should have been a wake-up call for policymakers. Instead, the UN Secretary General stoned once again the oil industry to “feast” on record profits and urged governments to make them pay for it.
Meanwhile, OPEC’s production shortfall last month achieved 3.58 million bpd – a figure equal to around 3.5% of global demand – and the United States continued sell oil from its strategic petroleum reserve.
These seemingly unrelated stories have something very important in common. Both clearly suggest that a global supply shortage is imminent. Add to that the news that Russia’s oil exports could fall by some 2.4 million bpd after the EU embargo came into force in December, and an oil shortage will become more or less inevitable. .
Oil demand has remained resilient in the face of a host of challenges, and even prices above $100 a barrel failed to dampen it significantly earlier this year. Now the prices are somewhat tempered, but the embargo is still about two months away. Once that happens, prices are sure to go up as the alternative supply is limited. And the United States will have to start filling their SPR at some point because it runs out.
The Wall Street Journal sounded the alarm on this issue this week. Author Jinjoo Lee cited the Energy Information Administration said inventory levels at the SPR fell another 7 million barrels in the week to September 16, meaning the total was 427 million barrels. And that number was the lowest SPR inventory level since 1984. It’s also the first time there’s been 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 intention of starting to replenish the SPR anytime soon. In a report earlier this month, the Department of Energy refuse a Bloomberg report that it was waiting for oil prices to drop below $80 a barrel to start filling the SPR.
This suggests that the DoE has no immediate plans to start populating the SPR, and this is a cause for concern as oil supply shocks tend not to be obvious until they are. become painfully so. And a supply shock is definitely coming to Europe if the US isn’t there to help. Add to that the subdued growth in US oil production and statements from industry leaders that the US will not be able to bail out Europe with oil or gas, and the picture looks pretty grim.
Meanwhile, as the EU begin talks about a cap on Russian oil prices, in addition to the embargo, US senators are to push for increased sanction pressure on buyers of Russian crude to ensure that the other price cap, the one agreed by the G7, works. If either of these latest efforts results in a decision to act, there is little doubt that Russia will react exactly as it said: no oil sales to cap prices. And that means even less oil for everyone.
It seems that many people in positions of power are unaware of this threat. In fact, during a congressional hearing this week, Rep. Rashida Tlaib asked the heads of America’s biggest banks if they had ever devised a strategy to exit oil and gas investments as a whole. The question suggests that the latest developments in supply and demand – and prices – have escaped the attention of Representative Tlaib, just as they have escaped the attention of Antonio Guterres.
The answer that JP Morgan’s Jamie Dimon gave to Rep. Tlaib’s question during Wednesday’s hearing, however, is one for the books. “It would be the road to hell for America,” Dimon said in what is perhaps the most stark assertion yet that economies run on oil and gas, and they will continue to run. to oil and gas for many decades, regardless of the direction of the energy transition. take.
The proof is there under all our noses: Europe. Despite its best efforts to become the world’s lowest emitter – which it did for some time – Europe has prospered not on cheap solar and wind power, but on cheap gas and oil. abundant. Now that they are gone, European economies are beginning to collapse.
Avoiding an oil supply shock would be difficult under current circumstances. The OPEC+ deficit is not entirely the result of conscious action. In fact, most aren’t, and that means it would be nearly impossible to compensate. And the United States cannot afford to continue to tap into its SPR any longer without doing something in the replenishment department. It’s called strategic for a reason, after all.
By Irina Slav for Oilprice.com
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