Q+A: Why gas and coal are our trump cards in an energy crisis
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Sean Alma. Whether you're a consumer, an investor, a business person, or all three, oil and gas matter. And we've realized that over the past six weeks. Today, we're going to talk about why they matter so much, and given the current state of the world, what's going to happen to supply, demand, and prices. Vivek Dhar is Head of Commodities and Sustainability Research at Commonwealth Bank. Vivek, welcome back to Fear and Greed Q&A. Thank you for having me. Vivek, oil and gas. Just explain why they matter so much, and then after that, I'm going to ask you, so what happens now?
Sure. So look, when it comes to both oil and gas, what we're talking about, the Strait of Hormuz, is that it's a massive choke point.
Why do oil and gas matter in the current energy crisis?
So we're talking roughly a fifth of global oil supply goes through that narrow waterway called the Strait of Hormuz. And then you have about 20% of global LNG trade that goes through that same point. And so you can just imagine that now that we've decided to shut the Strait of Hormuz because we've seen tensions in the region, particularly Iran controlling the strait, we are now seeing that come through in terms of prices. And this isn't just the story of, oh, we're going to see some expectation of supply cuts, which has really been the narrative when we talk about what's happening in the Middle East. We are talking about actual physical supply disruptions. Every day, as we talk right now, we're talking roughly between 10% to 12% of global supply isn't coming to meet demand.
And that is why there is so much concern right now, particularly in oil markets, that we are going to be caught short.
The Strata for Moors, is that the only option from that region? I'd imagine any other option, it makes for a mighty long trip. But is it the only way to transport oil?
Look, there are other ways, and we're seeing two of them right now be key mitigants to this idea of losing a fifth from day one. One, and the biggest one, is the east-west pipeline owned by Saudi Arabia. That can take about 7 million barrels a day, 5 million barrels a day, which is additional. And so that is providing some buffering because we're seeing exports come out of the Red Sea, which is avoiding the Strait of Hormuz. But the other one, which has been a surprise package so far, has been Iran's oil exports have been allowed to flow. And that's added another one and a half to two million barrels a day to the market. So these two avenues have been the key reasons why we haven't seen a fifth of global oil supply sidelined right now.
They're key mitigants. The other parts that are happening in global oil markets, which is reducing the disruption effect, is we're seeing inventory drawdowns. And that's being engineered by the major consumers of oil, but also we're seeing sanctions taken away from Russia and even Iranian oil, which is making it available to the market. So overall, instead of that 20% of global oil supply that's disrupted, we're closer to about 10%. And that's all to do with the bypasses, the inventory drawdowns and Iran's exports.
That would have a limit, though, wouldn't it? Well, certainly the inventory drawdowns is going to have a limit by definition. The bypasses, maybe not. And depending on the relations between Iran and the US about whether or not they will be able to export their oil. And in fact, you know, in the last 24, 36 hours, Donald Trump has suggested he won't allow Iranians to export oil. When... Does that really become crunch time? And for listeners, it's probably not quite crunch time yet, but when do we actually know that we can't draw down much more?
So this is probably like when we talk about inventories that are being held by the major consumers, there's quite a bit. But even when we look at what's held, the question is how quickly can you take it from the inventories themselves? And the flow rates out of it, we're talking roughly 1.2 to 2 million barrels a day.
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