Strategic Reserves Are Nearly Drained. The Oil Price Crisis Is Only Now Beginning.
Oil prices haven't spiraled over the past six months thanks to three buffers: strategic reserves, sanctioned oil, and China buying less. Now all three are being drained, and the real shock is only about to hit diesel and prices.
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Close Hormuz and a fifth of the world's oil is gone
The war began with Iran closing the Strait of Hormuz, immediately cutting off about 20% of global oil supply. This was the move everyone considered the "nuclear option"—no one wanted to see it, because it's too bad for all sides. Once the strait closed, oil prices shot from around $70 a barrel to well over $100. But the market didn't spiral out of control; instead it found several buffers to hold prices down. The real question isn't "why did it rise" but "why didn't it rise more."
Three buffers, each less durable than the last
The first is the U.S. Strategic Petroleum Reserve, emergency crude stored in salt caverns along the Gulf Coast after the 1970s Arab oil embargo, plus commercial inventories held by refiners—levels were high before the conflict. The second is sanctioned oil: a large "dark fleet" of Iranian and Russian crude floating at sea, and in March the U.S. temporarily allowed other countries to buy it. The third is China—the world's largest oil importer, normally buying about 12 million barrels a day, roughly 10% of global supply, but earlier this year it bought about 3 million barrels a day less, effectively giving oil to others. Together, these three kept oil below $100 and the national average gasoline price just under $5.
Ceasefire talks made analysts look foolish
In June, the U.S. and Iran began peace talks and reached a ceasefire, and market sentiment flipped 180 degrees: from "extreme crude shortage" to "crude surplus," with analysts predicting oil would fall to $70 or even $60 a barrel. But the peace deal collapsed weeks later, Iran closed the strait again, and Trump declared the ceasefire over. So it was back to the state at the start of the conflict. This episode shows one thing: this round of prices contains a lot of bets on "the war ending soon," and that bet has repeatedly failed.
Six months of draining, and the buffers are nearly dry
Commercial inventories have been drawn down, strategic reserves released—and reserves can't be released at will; the government only authorized a specific amount. The U.S. has taken more than 130 million barrels from the strategic reserve, leaving about 280 million barrels. That sounds like a lot, but it's approaching the authorized limit. Worse, this time there's an added refinery crisis: Middle Eastern refineries were hit in the war, and Ukraine, in self-defense, knocked out a large chunk of Russia's refining capacity—and Russia is the world's second-largest diesel exporter. Once a refinery is destroyed, it takes months to restore. So now it's not a question of whether there's crude, but whether there's enough refining capacity to produce the fuels the world needs.
Venezuela can't put out this fire
The Trump administration calls Venezuela a solution, and its reserves may be the world's largest. But reserves being there doesn't mean production capacity is there: to actually raise output, you need money, rigs, people, drilling, and then moving barrels out—that's roughly years and billions of dollars of investment. As for other "miracle solutions," Benoit says there basically aren't any; you can only hope for "small miracles"—like China deciding to boost diesel production, or refinery repairs finishing early. But none of these will take effect tomorrow.
Gas stations haven't blown up yet, but diesel has
U.S. consumers haven't seen price spikes at the pump yet; what's really rising is diesel—the fuel that powers the heavy trucks moving consumer goods from one end of the country to the other. So the question becomes: will companies cut deliveries? When will they pass costs to consumers? Once diesel rises, all types of businesses have to factor it into their pricing. This is the real channel through which this shock transmits from energy markets to the real economy, and why "gas prices are okay" is a misleading comfort.
Two paths: absorb it, or pass it on
Businesses have only two choices. One is to absorb it without raising prices: Jim Barber, a third-generation farmer in Pennsylvania, has raised beef prices only once in five years. Even though the cost of hauling in hay is up 15% to 20%, he eats it himself, because he values relationships with customers and believes the conflict will end soon and holding out will be rewarded. Farmers' exposure to fuel is triple-layered—fertilizer, hauling in hay, and shipping their goods out—energy costs can be paid three times over. The other is to pass it on: Ambix, which makes plastic parts, uses resin, and resin comes from oil. Some costs rose 30%, 40%, 50%. At first they resisted raising prices, but as the war dragged on they began passing the 60 cents their suppliers raised directly to customers.
August diesel at $6, the shock starts embedding in the economy
When energy prices eased this summer, many businesses had a moment of optimism, thinking maybe they were coming out of the woods. Then in August tensions flared again, fuel prices rose again, and recently diesel hit $6 a gallon. Owen thinks this is the moment when some businesses and economists began to realize "the price shock is truly embedding in the economy." Meanwhile, JPMorgan commodity analysts said in their latest forecast that they no longer know how to model it—there's no baseline, because they can't see around the corner. On paper many economic indicators are healthy, but consumers feel terrible about prices, and no one—oil executives, politicians, or CEOs—can say clearly how long this will last.
In their own words · checked verbatim
You know, for most of the year, people were like, oh, we're going to drive off the cliff. And then we're like, oh, actually, wheels are still on the ground. We're OK. It could be worse.
Benoit Morin0:00
We've bought time for the past six months. And now time has finally run out. All those solutions are finally gone.
Benoit Morin1:00
There's no more, you know, fanciful scenarios of this could be over tomorrow. It's not going to get worse. This is finally, you know, the rubber hits the road.
Benoit Morin8:15
It's really the lifeblood of the economy.
Benoit Morin9:16
So you might be paying energy costs, you know, three or more times.
Owen Tucker-Smith13:28
We just got JP Morgan commodity analysts, like, put out their latest forecast. And they were saying, we don't even know how to model this anymore. Like, there is no baseline because you can't see around the corner here.
Owen Tucker-Smith16:38
Figures
| Share of global oil cut off by the Strait of Hormuz closure | About 20% | 2:03 |
| Oil price range after the strait closed | From about $70 a barrel to well over $100 a barrel | 2:03 |
| China's daily oil imports | About 12 million barrels a day, about 10% of global supply | 5:10 |
| China's reduced oil purchases this year | About 3 million barrels | 5:10 |
| Amount the U.S. has taken from the strategic petroleum reserve | More than 130 million barrels | 8:15 |
| Remaining U.S. strategic petroleum reserve | About 280 million barrels | 8:15 |
| Increase in farmer Jim Barber's hay hauling costs | 15% to 20% | 12:23 |
| Increase in some Ambix costs | 30%, 40%, 50% | 15:36 |
| Recent diesel price | $6 a gallon | 15:36 |
Glossary
- strategic petroleum reserves
- Emergency crude stored in Gulf Coast salt caverns by the U.S. since the 1970s oil embargo.
- tank bottoms
- The point at which crude in a tank is too low to pump out, meaning inventories are completely drained.
- dark fleet
- A fleet of tankers transporting sanctioned oil while evading regulation.
- resin
- A chemical feedstock made from oil, the core ingredient in plastic products.
How to listen
Investors and founders watching energy, commodities, and the inflation transmission chain, especially those who need to judge when diesel costs enter their own cost structure.
09:16 to 10:17 on Venezuela, low information density, can fast-forward.