Welcome to Thoughts on the Market.
I'm Ariana Salvatore, head of public policy research.
Today I'll be talking about the ongoing conflict in Iran and the policy options to offset a rise in oil prices.
It's Wednesday, March 25th at 8 p.m. in Tokyo.
The US-Iran conflict is stretching into its fourth week and markets are still trying to distill headlines for news of an off-ramp or further escalation.
Even here in Tokyo, the global supply crunch is top of mind.
But we're also watching for second order effects among a number of key supply chains ranging from food to semiconductors.
As you've been hearing on the show, the Middle East is a critical supplier of aluminum, petrochemicals and fertilizers all industries that are energy intensive and deeply embedded in global supply chains.
There's also sulfur, which is needed to produce copper, and cobalt, largely used for chip materials and components, and helium, which is a critical material for semiconductor manufacturing.
So, with all this supply chain disruption on the line, what are policymakers' options to mitigate that loss?
Let's start by putting some numbers around the disruption.
The Strait of Hormuz accounts for about 20% of global oil supply and about a third of seaborne oil.
Our strategists highlight three potential offsets.
First, alternative pipelines.
Saudi Arabia maintains an east-west pipeline and the UAE similarly has a smaller-scale Abu Dhabi crude oil pipeline.
Those together can allow for some crude to bypass Hormuz.
Second, the U.S. has publicly discussed potential naval escorts.
We've written about the logistical difficulties with this plan, in addition to significant execution risks.
Third, the IEA has coordinated a strategic stock release which could translate to a sustained release around 2 million barrels per day, depending on the duration of the conflict.
There are also geographic considerations, though, that can add a lag to those strategic releases.
On net.
Putting it all together, our oil strategists think these policy levers can mitigate about 9 million barrels per day from the lost 20, meaning that the global economy will still have to contend with a loss of about 11 million barrels per day, more than three times the supply shock the market feared from the Russia-Ukraine conflict back in 2022.
So, given those limitations, we're starting to see countries around the world, particularly in Asia, begin to implement rationing measures to conserve energy.
The Philippines, for example, has implemented a four-day workweek for government workers and mandated agencies to cut fuel and electricity use.
Myanmar has imposed driving limits and Sri Lanka has introduced gasoline rationing.
But what about in the U.S.?
We've seen domestic gasoline prices climb due to this conflict and the national average is now close to 4, almost a full dollar up from where we were about a month ago.
The president has announced a number of policy efforts, including a Jones Act waiver which temporarily allows foreign vessels to transport fuel between US ports and a temporary pause on some Russian and Iranian oil sanctions.
President Trump has also directed a release from the Strategic Petroleum Reserve but, similarly to the IEA stockpile, the flow rate is going to be the key limit.
The authorization was for 172 million barrels over an 120-day period, which translates to just about 14 million barrels per day on average.
So what should we be watching?
Tanker transits, signs of upstream shut-ins at storage fills, refinery run cuts and, most crucially, whether policy announcements on insurance and escorted convoys can actually translate into reality.
These are all going to be critical elements going forward.
For now, our oil strategists have raised their near-term Brent forecast to 110 per barrel, which underscores our US economist outlook for weaker growth and stickier inflation than previously expected.
And for now, policy tools seem to be unable to meaningfully offset that disruption.
Thanks for listening.
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