The recent closure of the Strait of Hormuz puts a spotlight on wise energy security investments by energy consumers and producers over the last 50 plus years. Credit Henry Kissinger’s diplomacy for convening oil embargoed allies in 1974 and founding the International Energy Agency (IEA) at the State Department, where I worked on energy issues for over 30 years. The IEA remains the energy security backbone for OECD plus other member states, all 32 of which hold at least 90 days of net oil imports as strategic reserves. Even though the U.S. is now the world’s largest oil producer, its 411 million barrel Strategic Petroleum Reserve (SPR) is the organization’s largest. The SPR has fallen from a 2009 high of 727 million barrels partly due to imprudent draw-downs by the previous Administration to manage prices which overcompensated for the initial oil market jolt caused by Russia’s cruel war on Ukraine. Mandated SPR sales by Congressional budget hawks over the past decade are also an inconvenient truth to reckon with today as the Strait is being mined and commercial ships are being attacked by Iran.
Japan maintains robust reserves of nearly 150 days of imports, which as an energy deficit country it has resisted using to manage prices. Germany, France, Italy, the UK and others all maintain a mix of crude oil and product stockpiles. The world’s largest oil importer, China, took advantage of soft oil markets in recent years to build a reserve of nearly a billion barrels, which is not unhelpful in the current environment. Ironically, nearly 50 million barrels of sanctioned oil from Russia and Iran are idling off China and India. Secretary Bessent is playing a wise hedge strategy by easing restrictions on some of these floating barrels owned by Russia over the next 30 days. Seems like a good trade, all things considered.
Over the past 15 years, the United States, Brazil, Canada and Guyana have made major investments in incremental oil production capacity that moved the center of global oil production from the Persian Gulf to the Western Hemisphere, all of which looks prescient today. The restoration of diplomatic relations with Venezuela this week, and the easing of sanctions on its oil exports anchors this hemispheric geopolitical shift in our favor.
Saudi Arabia has also made sound investments in redundant infrastructure that benefits oil producers and consumers. The Saudis completed the East-West pipeline to the Red Sea in 1982 over concerns that Iran could one day shutter the Strait of Hormuz, as it did today. This pipeline, and recent investments in oil terminals around Yanbu, combined with tweaking adjacent natural gas liquids pipelines, gives the Saudis an insurance policy exceeding 6 million barrels a day of surge export capacity on the Red Sea. The UAE also has a 1.5 million barrel a day work around to Fujairah, on the Gulf of Oman while Iraq is attempting to reopen a pipeline that could ship almost 300,000 b/d from Kirkuk to Ceyhan on the Mediterranean. These alternative routes still leave about 8 million barrels a day of Gulf crude oil production stranded.
Fortunately, otherwise robust commercial oil storage, and the IEA’s call for its largest ever coordinated oil release, which remains the agency’s core function, despite its mission drift, will significantly erode Iran’s ability to play the oil card over the critical weeks ahead. When the dust settles, it will be a good reminder for the IEA to stick to its energy security mission, for the U.S. to repair and restore the SPR to full capacity, and a call to arms for other oil producers to make investments in multiple overland routes to keep their primary exports flowing to world markets.
Matthew McManus is a former State Department official, a visiting fellow at the National Center for Energy Analytics and an adjunct professor of energy diplomacy at Georgetown University.
This article was originally published by RealClearEnergy and made available via RealClearWire.
