Our Head of Public Policy Research Ariana Salvatore
breaks down what’s being discussed by policymakers around the
world to try to cap the oil price spike.
Read more insights from Morgan Stanley.
----- Transcript -----
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 8pm in Tokyo.
The U.S.-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 sulphur, 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 percent 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 of around 2 million barrels a 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, 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 be short 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 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 U.S. 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
a 120 period, which translates to just about 1.4 million barrels
per day on average.
So what should we be watching? Tanker transits, signs of upstream
shut-ins as 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 U.S.
economists’ 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. As a reminder, if you enjoy Thoughts on the
Market, please take a moment to rate and review us wherever you
listen and share the podcast with a friend or colleague today.
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