Global Fuel Shortage Pushes Governments Toward Demand Controls
- Fuel rationing is spreading across Asia and Europe as supply losses mount, raising fears of a prolonged energy crisis.
- High prices and shortages are triggering demand destruction, particularly in Asia and Europe.
- Both governments and markets are forcing reduced consumption, likely hurting the global economy.
This week saw something that does not happen very often. WTI, normally trading at a discount to Brent crude, moved higher than the North Sea-focused benchmark. Traders explained it with fears of tight supply in the immediate term and some relief later this year. Some, however, doubt this relief would come soon enough to avoid something few like to talk about: demand destruction.
Indonesia has started rationing fuel, capping daily fuel purchases to 50 liters per car for private consumers and sending civil servants to work from home to conserve fuel. Thailand is preparing its own fuel rationing plans. In Bangladesh, rations are in effect, universities have closed, and the country is nevertheless close to running out of fuel, as it imports 95% of what it consumes.
The rationing is spreading to Europe as well. Slovenia became the first European country to impose fuel rations at the same 50-liter level as Indonesia. In fairness, this amount of fuel for personal use on a daily basis is not really a meaningful ration since very few people consume a full tank of gasoline or diesel on a daily basis unless they travel for work purposes. But the move could be seen as symbolic, and the start of demand management measure should the fuel supply situation get worse, which is quite likely.
In mid-March, Kpler reported that the cumulative oil production losses from the U.S.-Israel war against Iran had reached 133 million barrels. Daily production was down by 10.7, which could reach 11.5 million barrels daily by the end of the month—and quite likely did. But as the war continues, oil supply losses would only grow. If hostilities are not over by the end of this month, the losses may well reach the amount that the International Energy Agency said it would release to fill the supply gap, namely 400 million barrels.
Meanwhile, diesel futures in Europe hit $200 after news broke that three tankers carrying diesel from the United States to Europe had diverted to Asia. Calls have started for fuel rationing in the European Union, and the EU’s energy commissioner just admitted to the Financial Times earlier today that rations are being considered as an option to manage demand for energy in a context of shortages. “This will be a long crisis ... energy prices will be higher for a very long time,” Dan Jorgensen told the FT.
Demand destruction is a concept that the oil and gas industry is quite familiar with and has every reason to dislike. Demand gets destroyed either when an unexpected event forces people to stop consuming oil and gas, or when the price becomes too high, making oil and gas simply unaffordable. The first scenario played out in 2020 when the world went into lockdown to avoid mass infection with COVID-19. The second is playing out right now. With over 11 million barrels daily in lost physical oil supply and a solid portion of the world’s natural gas supply, both are getting a lot more expensive than most consumers could stomach, and demand will start declining.
Bloomberg’s Javier Blas said in a recent column that the introduction of measures to destroy demand on purpose was the fourth step in the response to lost supply from industry and politicians after releasing fuel from stockpiles, rerouting whatever supply can be rerouted, and, as step three, more releases from stockpiles. The demand destruction step could take two forms: deliberate, guided by governments, or spontaneous, governed by market fundamentals. Blas argues that the latter form is the worse option because of its impact on the economy. Yet the first form is no more sparing for the economy: it is simply a matter of managed versus unmanaged disaster.
According to Blas, the world would need to reduce oil demand by a minimum of 8 million barrels daily. Measures suggested so far, by the International Energy Agency and the EU, include lower speed limits on highways, work from home, public transport instead of personal vehicle use, and car sharing plus boosts in fuel efficiency. These will not be enough even if implemented flawlessly, which is already doubtful. And this means that what we will probably see in terms of demand destruction would be a combination of deliberate and spontaneous shifts in demand, which will inevitably hurt the economy, wherever they take place.
At that stage, the question will become how long the damage will last, but we have not reached that stage yet. Per analysts, the return to normal would take between three and six months—once the war ends. The longer the bombing continues, the further away those three to six months move, and they also extend, because shut-in oil wells take longer to restart the longer you keep them shut-in. In short, the rest of this year is going to be no picnic.
By Irina Slav for Oilprice.com
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