Global oil security weakens as conflicts hit 45 million bpd of supply
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Almost half of the world's oil supply is produced in regions engaged in active conflicts, Reuters reported this week. The situation raises questions about long-term oil supply security and the limits to diversification. Physical supply has been severely compromised, leading to rationing and emergency releases from storage across the world.
Key Facts
- Almost half of the world's oil supply is produced in regions currently engaged in hot conflicts, Reuters reported this week.
- Ukraine is pursuing a campaign of bombing Russian refineries with drones, resulting in fuel shortages that have sent a ripple effect beyond Russian borders.
- Diesel prices in Europe are 70% higher than they were in February due to the continent's dependence on imported fuels.
- The Middle Eastern conflict has expanded with another major oil chokepoint under threat from attacks by the Yemeni Houthis, forcing shippers to re-route to alternative channels such as the Suez Canal.
- Iran and Oman were discussing joint management of the Strait of Hormuz, perceived as a sign the waterway could be reopened soon.
Conflict Zones and Supply Disruption
The Middle East remains the most obvious and disruptive example of conflict-driven supply risk. While speculative oil prices have remained capped by trader optimism, physical supply has been severely compromised, leading to rationing and emergency releases from storage worldwide. Ukraine's drone campaign against Russian refineries has caused fuel shortages that ripple beyond Russia's borders, as Russia was the world's second-largest fuel exporter after the United States. The Gulf states together were also large exporters of refined fuels, prompting analysts to warn that the fuel crisis, not crude oil, needs urgent attention.
Refining Capacity and Fuel Prices
Addressing the fuel crisis is difficult because the world's refining capacity has shrunk considerably over the past decade, especially in Europe. Europe is now struggling with diesel prices 70% higher than in February due to its dependence on imported fuels. The Middle Eastern conflict has expanded, with another major oil chokepoint under threat from attacks by the Yemeni Houthis. Attacks have already forced shippers to re-route to alternative channels such as the Suez Canal, adding costs to the final price of cargo on top of the war premium already crushing demand in poorer countries.
Strait of Hormuz and US Reliance
Latest reports from the Middle East pushed oil prices lower, saying Iran and Oman were discussing joint management of the Strait of Hormuz. The discussions were perceived as a sign the waterway could be reopened soon, despite Iran's threat to block all oil from the Persian Gulf if the U.S. imposed more sanctions. Ukrainian forces continue striking refineries daily, and while repairs have brought several facilities back online, fuel supply remains constrained and the ban on gasoline and diesel exports is still in place. All these events have increased the world's reliance on U.S. crude and refined fuels, with the latter dependent on heavy crude supply from Canada and Venezuela, which may now move lower.
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Global oil security weakens as conflicts hit 45 million bpd of supply
