Chapter 1: What is the main topic discussed in this episode?
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The war in Iran is still going on. The Strait of Hormuz is still mostly blocked and oil is still trading above $100 a barrel. This has now been going on for nearly three months. Nearly 80 countries have introduced some kind of emergency measures to protect their economies from higher energy prices. But the world is mostly merrily getting through its oil reserves.
Today on the show, are we getting close to a tipping point? Do reserves hit a low point and send oil prices screaming higher? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at FT Towers in London, where we have a long weekend ahead. And yes, people, the forecast is sunshine. Sun's out, guns out.
The big man, Rob Armstrong, is on his hole somewhere. But joining me in the studio in the depths of FT Towers, we have another big man, Malcolm Moore, the FT's energy editor. Regular listeners will recall that he knows which way is up on the energy beat. Malcolm, thank you for coming back on the show. We didn't put you off too much last time.
Have you had any days off since we last did this at the start of April?
Um... What a question. This is not the time for days off.
Yeah, it's tough out there when the energy beat, right? So, look, you've been writing about this recently, this concept of a tipping point, because oil and gas reserves exist for a reason, right? It's for this sort of eventuality, right, where you can't get hold of the stuff and so you have some squirreled away, you know, down the back of the sofa kind of thing.
How far through these reserves are we getting and how dangerous is that?
Well, I think I recall the last time I came on the show, I said that the energy market was, I think, tearing its hair out or exploding in some sort of confusion at the fact the rest of the world wasn't paying enough attention. I mean… Wherever we were last time, whichever bit of hyperbole we were at, we're further along that curve now. Cool.
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Chapter 2: What is the current state of oil reserves amid the Iran war?
They have three billion barrels more or less of oil in reserve. But it's not – I mean, we call them reserves. They're not really reserves necessarily. This is basically what the system, a lot of it, I mean, obviously there's a margin, but a lot of it is what the system needs to operate, right? So pipelines, in order to work, they have to have oil in them, right?
And refineries, in order to make gasoline, they need to have crude oil waiting to be turned into gasoline. So all of this stuff is just, you know, it's...
It's kind of sloshing around the system.
It's working capital. It's not a stockpile. It's just what you need to do your business. And they're companies, right? So they don't want to hold stuff that they don't need.
Chapter 3: How are countries responding to rising energy prices?
There's no profit in that. So they're required by governments to hold a certain amount. which is lucky because it's probably a little bit more than they would hold if it was up to them. But they don't have a huge margin. Now, the other type of reserve are the government reserves, the most famous of which is the U.S. Strategic Petroleum Reserve.
And there's 1.2 billion barrels of that, of which we have used 400 million, or we will have used 400 million at some point over the summer. So that's good. But just very clearly, companies have got a lot, but a lot of it's being used. Governments have less, but all of that is available. Now, as the war continues, we're in the situation where we are using more than we have, right?
Demand has not really fallen.
Chapter 4: Are we approaching a tipping point in oil reserves?
In fact, it's summer, so demand is going to go up, right?
Because we have, like, driving season in the States and because Europeans go on holiday on aeroplanes and, you know, and, and, and, and there's air con in Europe that suddenly needs to, like, really kick into gear. I mean, look, this might be a stupid question, so tell me if it is, but the reserves that we have It's not like a car, right?
You can drive your car until it literally runs out of petrol and then you can just point it down a hill and keep going.
Have you done that?
I have actually.
Sounded strangely familiar, look in your eye, recalling a happy time.
It's a long story. But is the same true of these sorts of reserves? Can you run them down to zero or is there a level at which there's just not enough in the pipes?
Yeah, you cannot run them down to zero. So for safety reasons, I think that the line is about 25%. It needs to be 25% full. The tanks need to be 25% full. Otherwise, they get clogged. Obviously, like any liquid, all the crud settles at the bottom of these tanks. There are all sorts of operational problems.
So, A, we need those reserves to make the system work and B, the margin is even tighter because a lot of it is the buffer that needs to be there under all circumstances. Right. So, yes, we're getting to, you know, squeaky bum time. Yeah. And the oil industry is jumping up and down and saying, hey, we have a real problem here, everybody. Yeah.
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Chapter 5: What types of oil reserves exist and how are they utilized?
I mean, it helps make the market run efficiently. So I I don't think they're distorting where the price is. I just think that people think it's a crystal ball. That's not its purpose. Its purpose is to deliver certainty today for people who are trying to make their plans so they don't have to worry about what the future price is.
So the frazzled energy pointy heads who you speak to, they... That's very mean.
They don't have pointy heads.
I say this with love. So they're looking at the futures curve, which says six months from now, the oil price is going to be about $80 a barrel. Today, it's about $106, $106 a barrel when I last looked at a screen.
If we do hit this kind of sudden stop, if you like, where we really do hit the buffers on what's left in the reserves, worst case scenario, what's the most plausible worst case scenario you've heard for where the benchmark price goes?
I mean, I've heard all sorts of prices, right? But most of them congregate around the $200 a barrel mark. And the reason for that is, you know, if we remember, the all-time record for a barrel of oil was just over $140, and that was about 14 years ago. So actually, in today's terms, in real terms, the spot price is still... Not that high.
Not too bad.
But on the other side of the ledger, nobody really knows what happens when oil goes above a certain level in terms of demand. Right. Nobody knows whether people really just say, actually, I'm going to stop driving now or I'm going to stop flying or like nobody knows how quickly demand collapses. Lots of people have tried to model it. It's very difficult to model. It's very, very tricky.
So people are unwilling to say mad things like, oh, $400 oil, partly because people have said mad things like that before and then had egg on their face. But also because above $200, who knows how quickly demand disappears.
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Chapter 6: How does demand affect oil reserves during summer?
That has to wait.
Sorry, I'm short barnacles. I've seen a supertanker. These are not small things. I've seen barnacles. These are very small things.
Yeah, but you get a lot of barnacles.
Are a lot of barnacles going to eat a supertanker? I don't think so.
Oil tankers are very big. But if you get enough barnacles, surely there could be a problem.
I am willing to say that yes, I expect that the more barnacles you have, the slower you would move through the water. And indeed that that could be a problem if you're trying to outrun the IRGC through the Strait of Hormuz. So yes, I'm not going to minimise that these small sea creatures could present a threat to global oil markets.
But are you simultaneously saying this isn't necessarily the biggest issue in the Strait of Hormuz at the moment?
I'm still going to go with the missiles and the speedboats and the mines being a more important issue than the barnacles.
We will check back on this prediction at a later date. Maybe we could send the barnacles to attach themselves to the mines and this whole problem will go away.
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