Crude confusions confound crisis

The current situation is “very severe,” states the International Energy Agency (IEA). The scale of the shock, and the crisis may exceed the twin ‘crude’ shocks of the 1970s (1973 and 1979), and the rude one after the Russia-Ukraine war in 2022. “This crisis… is now two oil crises, and one gas (Russia) crisis put together,” warned Fatih Birol, the head of the IEA. This is the gravest warning that has emanated from a global expert agency, whose understanding of the energy markets is immense. Yesterday, the Indian Sensex was down by more than 1,800 points, albeit a 100 points over the intra-day low.

Decisions by the world leaders, especially the Americans, hint at a similar analysis. In the past few days, the US allowed Russia to sell oil, and even urged Iran to sell its oil despite the western sanctions against both nations. The US president, Donald Trump, then gave a 48-hour ultimatum to Iran to open the Strait of Hormuz, or the US would “hit and obliterate” the latter’s power plants. Just before the end of the ultimatum, Trump declared “peace through strength,” and described it as being put “mildly.” Iran responded with a similar paradox.

First, Teheran said that it would allow tankers to pass through the Strait, except for the enemy vessels that included the American ones. Later, after the 48-hour ultimatum, Teheran mocked Trump. “Hey, Trump, you are fired. You are familiar with this sentence. Thank you for your attention to this matter." The first line echoed the language the US president used when he hosted the show, The Apprentice. The last one is the typical Trump sign off in his social media posts. After the “hit” warning, Teheran stated that it would retaliate.

“If Iran’s fuel and energy infrastructure is attacked by the enemy, all energy infrastructure, as well as information technology, and water desalination facilities, belonging to the US and the regime in the region will be targeted pursuant to previous warnings,” screamed Teheran. This was days after Iran unleashed a long-distance missile to attack ships in the distant ocean, a move that stunned and shocked several military observers. Not many realised that it had this capability. Teheran’s missiles seem to have a longer range than expected.

Of course, the IEA is concerned about the near-closure of the Strait of Hormuz, which is the oil lifeline, and main transport artery for global energy flows. It triggered the largest-ever supply shock, much larger than those of the 1970s, which disrupted economies. Hence, the flames in the Middle East can easily engulf and envelope the economies in Asia, Americas, Europe, and Africa. In fact, no nation is safe. As Birol said, it is no longer about oil and gas, as “some of the vital arteries of the global economy, their trade, is interrupted.”

Social media is full of insights, pieces, articles, and blogs by experts and amateurs on how this crisis has expanded beyond crude. In fact, crude is an extremely ‘crude’ explanation of it. Now, there are talks about how fertiliser supplies will be derailed, how the lack of sulfur will affect mining in sensitive metals and minerals, and how the manufacturing related to artificial intelligence, smartphones, and tech gadgets will be hit. Lower refinery production of petrochemicals will impact the textile sectors, and manufacture of plastics. The list goes on.

Large consumers like India and China are scouring for new sources, any sources, to acquire crude oil, and other products like liquefied petroleum gas (LPG). This is despite the IEA stating that it will release 400 million barrels from the emergency strategic reserves. Iran apparently allowed two Indian ships carrying LPG. New Delhi plans to purchase double the quantity from Washington, which has pushed the former to buy energy from it for more than 12 months. China is relying on Russia, as is India, as also smuggled and legal oil supplies from Iran.

In media interviews, IEA’s Birol explained that even if the war ends soon, the destruction in the Middle East will require months before the energy assets come back to normal operations and supplies. “It will take six months for some (sites) to be operational, others much longer,” he said in one of the interviews. According to him, the world leaders and policy-makers were underestimating the scale of the disruptions, and nearly a fifth of the oil and gas supplies were stranded. The leaders possibly do not want to scare away their citizens, and potential voters, by airing extreme negative views. They wish to convey things are under control, even if they are not, and the keys are with the others.

Different consumer nations have reacted differently over the past three weeks. China has enhanced illegal sourcing from Russia and Iran, apart from paying huge premiums to divert oil and gas. India did the same, and a ship bound for China took a U-Turn mid-ocean, and sailed to India. Prices of some of the products, including LPG, have gone up, either marginally or steeply. India has asked refiners to hike LPG production, and curtail others. Bangladesh and Thailand have begun to ration fuel, and draw on internal emergency reserves.

For a country like India, there was a lucky respite, as temperatures came down dramatically and suddenly in North India over the past several days. This reduced the demand for power, as before the cold wave, households had begun to use ACs and coolers. But with the hot season around the corner, if the war continues, power demand will peak. The annual coal production of over a billion tonnes for the second year in row has provided some confidence. Officials are in talks with the coal miners, including the state-owned near-monopolist, to gauge whether there is enough fuel, or can production be ramped up further.

According to a media report, “The country has enough generation during daytime to meet the surge in demand…. The evening, when nearly 140 GW of solar capacity is idle, can be trickier. That could be compounded by disrupted supplies of liquefied natural gas, putting more pressure on coal-powered plants. India’s summer starts in April, but in recent years the nation has seen temperatures rising from March (though there was a respite this year). There is an increased likelihood of more heatwave days across many parts of the country in the three months to May 31, the Indian Met Department said earlier.”