VULNERABLE countries that paid a high economic price during the Iran war are seeking to build domestic oil and gas storage buffers against future shocks, a drive that could bring roughly half a billion barrels of additional demand down the pike.
While the near-total closure of the Strait of Hormuz cut off a fifth of global oil and liquefied natural gas supplies for over three months – reshuffling energy markets and boosting Brent crude to nearly US$120 a barrel – it could have been far worse.
One key stabilising force was the world’s ability to tap emergency reserves.
The drawdown – the sixth since the energy watchdog’s creation – validated a strategy forged after the 1973 Arab Oil Embargo, under which IEA members must hold emergency stocks equal to at least 90 days of net imports.
China offered a second lesson.
Although not a full IEA member, China has spent years building what is believed to be the world’s largest SPR, holding more than a billion barrels to guard against such a scenario.
With this “rainy day fund,“ the world’s largest energy importer reduced crude purchases by more than a third during the war. It may not have drawn down reserves by as much as the import drop implied, but it signalled a willingness and ability to tap its stockpile.
Stepping away from the market during a period of tight supply and high prices saved Beijing billions of dollars and helped insulate it from the economic distress seen elsewhere in Asia, which relies on the Middle East for roughly 60% of energy imports.
The pain was particularly acute in India, Pakistan, Thailand and other economies with limited domestic reserves. Lacking substantial emergency stockpiles, governments turned to subsidies, fuel curbs, shorter work weeks and other austerity measures to curb consumption.
Many vulnerable importers are now likely to expand their SPRs where fiscal space allows, while those unable to afford it may strengthen demand-reduction plans instead.
India is in clear need of larger strategic reserves. It is the world’s most populous nation, the third-largest oil importer and the second-largest importer of liquefied petroleum gas used for cooking, and is set to become the single biggest source of global oil demand growth through 2030, according to the IEA.
Yet India is not a full IEA member and did not join the agency’s coordinated reserve release during the war. Its reserve covers just eight days of imports; meeting the IEA’s 90-day standard would require more than 400 million additional barrels, costing roughly US$28 billion (RM116 billion) at US$70 per barrel.
New Delhi now appears to be moving in that direction, asking Oil and Natural Gas Corporation to build a 1.75 million-tonne – nearly 13 million-barrel – reserve that could expand India’s emergency storage capacity by about one-third, the Economic Times reported.
Pakistan is in a similar position. It relied on the Middle East for about 90% of its oil and LNG imports before the war and is now looking to expand domestic storage. Building reserves equivalent to 90 days of imports would require around 35 million additional barrels.
Australia, the only full IEA member that consistently failed to meet the agency’s SPR requirement, has announced plans to spend US$7 billion to hold at least 50 days of fuel.
Other countries, including Asia’s top oil-refining hub Singapore, are also considering building or expanding strategic oil and gas storage.
Europe already has an extensive gas storage system to manage seasonal demand, particularly in winter. But with imported LNG now accounting for more than 40% of its gas supply – and over 60% of those imports coming from the US – the region may opt to build additional government-controlled storage.
Even energy producers are moving in this direction. Gulf national oil companies are seeking more storage outside the region to preserve export flexibility in a crisis.
Saudi Aramco, which already operates storage facilities in Japan, South Korea, Egypt and northwest Europe, has signalled it is considering further expansion.
Taken together, these new storage plans could require around 500 million barrels of crude and refined products, based on ROI calculations.
Depleted inventories will also need refilling. Roughly 400 million barrels have already been drawn from global stocks since the start of the war, according to the IEA, with draws likely to continue through the summer even after Hormuz reopens.
Combined, that amounts to roughly 1 billion barrels of additional demand. Even if spread over several years, it would provide significant price support.
The timing may be favourable. The IEA expects global oil supply to surge next year as Middle East production recovers, potentially outstripping demand by more than 4 million barrels per day. Even a major storage-driven demand increase might therefore not send crude prices soaring.
That may not hold if Gulf supply recovers more slowly than expected, whether because of logistical problems or a breakdown in the Middle East’s precarious new balance of power.
The longer-term implications of this “urge to hoard” are even more complex. A world with significantly larger strategic reserves may prove more resilient to shocks, which could anchor prices over time. With greater buffers in place, countries such as India may reduce purchases during periods of tight supply – just like China – dampening price spikes.
As the Hormuz shock subsides, the lesson for importers is clear: “impossible” disruptions can happen, last longer than expected, and hit hardest where there is no cushion.
This article is written by Ron Bousso, a columnist for Reuters.
