[FREE] Q&A With Harvard Business Review
Excerpt from a lengthy discussion about the Iran War and the ongoing, historic energy supply crisis: how it works, how bad it could get, and how decision makers should think about the risk.
The 2022 energy price crisis serves as the most recent parallel to our current acute energy supply crisis, but it’s also incredibly different—and woefully insufficient a point of comparison—in many important ways. Amongst other topics in this lengthy Q&A with Harvard Business Review’s Thomas Stackpole, I provided some of my thoughts on the parallels and more important differences between the ongoing Iran War, which has prompted the oil industry’s most severe supply crisis in its history, and Russia’s invasion of Ukraine, which prompted our last energy supply crisis in 2022. Below you will find an excerpt from that discussion, and I encourage you to check out the full conversation.
(Excerpt)
How instructive do you think 2022 is? How are the situations similar and how are they different?
The main similarity is panic, but most of the underlying fundamentals are actually very different. Going into 2022, we had a very, very tight oil market. OPEC had cut a bunch of production in 2020 [during Covid-19] to balance the market, which I think was the right call by OPEC at the time because it saved us from an even more extreme bullwhip effect. But you saw this massive loss in supply as demand cratered. Thankfully, demand and the global economy recovered much more quickly than people expected, but we didn’t have the supply to keep up with it. Inventories were being drawn down and even before Russia’s invasion of Ukraine, and prices were heading back toward triple digits.
Then Russia invaded Ukraine. The big scare was that the International Energy Agency’s April report said that the combination of import bans and restrictions from the West would create a 3 million barrel a day loss of Russian supply. I remember thinking like, “Wow, that’s a crazy big supply loss.” In the end, though, we lost a million barrels a day and then it basically came back.
Right now, going into this, the market was quite loose. We actually were staring down a 2–3 million barrel a day surplus. OPEC had hiked a bunch of production. The global demand was good, but not stellar. And overall it looked like inventories were building and were going to press prices lower. If anything, we didn’t see lower prices last year because of the aggressive sanctions policy from the White House toward Venezuela, Iran, and Russia.
What’s happening today is about the difference between the fear of losing 3 million barrels from Russia and the 20 million barrels actually lost in closing the Strait of Hormuz. We’re talking about a seven-fold increase in the supply loss. And again, we never lost the three million barrels [after Russia’s invasion of Ukraine], but we have in fact lost the 20 million barrels per day from the market right now.
So, this crisis is really just on a completely different scale.
Right now, I think a lot of people are saying, “Well, we dealt with Russia really well. That ended up being kind of a nothingburger. The system showed how amazing it was at adapting to these types of shocks.” I think there’s a sanguinity in the market right now of, “Surely they’ll figure it out again.” And the system is attempting to reroute. There’s the east-west pipeline in Saudi Arabia, which can move—although we haven’t seen this proven yet—upwards of 5 million barrels a day of that 20 million from the Gulf to the Red Sea. Now there, the Houthis could become an issue again as we saw a few years ago. But that’s the single biggest offset. Then you have all of that sanctioned oil from Russia and Venezuela floating around.
Right now, Russia is the single largest beneficiary of this war. The Trump White House, to its credit, had actually done a very good job at tightening restrictions around Russia, and prices were getting much, much worse for Moscow. That was accomplished over eight months, and in two weeks of this war, all of that’s already been undone. India’s been scrambling for Russian barrels. Everyone’s been scrambling for Russian barrels to the point that even Eastern Europe has been clamoring to Brussels saying, “Can we ease some of these restrictions on Russian imports into the EU?” Because the massive pipeline that used to supply us would be really, really handy in this global oil shock.
Then the International Energy Agency (IEA) announced a major Strategic Petroleum Reserve release: 400 million barrels over roughly 120 days. That’s roughly 3.3 million barrels a day of flow back into the system—which, if we were in 2022, would be a staggeringly large number, but still very small relative to the loss we have.
Be sure to check out the rest of the full conversation for more.