Emergency oil is on its way

With the war in Iran squeezing global oil supplies, the International Energy Agency has decided to tap 400 million barrels of crude from its emergency reserves—the largest distribution in history.

Crude prices have surged since the US and Israel launched strikes on Iran, which has hit back where it hurts most: targeting oil tankers and laying mines along the Strait of Hormuz. This waterway delivers about one-fifth of the world’s oil supply from regional producers. Now, shipments are in a chokehold, roiling markets.

The IEA, a coalition of 32 countries including the US, made their call shortly after Japan announced it will release an additional 80 million barrels from its own reserves. Analysts estimate that tapping the IEA’s crude stockpile could help tide over the global economy by delivering around 4 to 4.5 million barrels per day for the next two months.

But although this infusion will help stabilize markets, it’s a bit like bringing a six-pack to a frat party, when what you really need is a keg.

The hard math: Around 16 million barrels of oil flowed through the Strait of Hormuz every day before it was closed. Thankfully, it’s not the only way oil gets out—Saudi Arabia is attempting to divert its supply via an overland pipeline to the Red Sea, with capacity to transport up to 7 million barrels per day (bpd).

Still, even if you add this to the IEA’s estimated infusion of 4 to 4.5 million bpd—which JPMorgan thinks will actually be closer to 1.2 million bpd when all is said and done—that leaves the world stuck with a crude supply crunch.

History isn’t on our side, either. The last time the IEA unleashed sizable reserves was in 2022 during Russia's invasion of Ukraine. It was rough going at first: Oil prices spiked as markets worried the IEA’s largess signaled the war was worse than they’d thought (just like what happened today), though prices eventually eased.

Stateside supply

The US will likely supply the lion’s share of the IEA’s crude distribution, but that may be easier said than done: the Strategic Petroleum Reserve (SPR) isn’t what it once was.

Like the IEA, we also tapped into our stockpile in 2022, releasing 180 million barrels of crude—or about 1 million bpd—to ease gas prices. The thing is, we never bothered to refill the petroleum piggybank. The SPR currently holds about 416 million barrels—well below its maximum capacity of 727 million. Its drawdown maxes out at 4.4 million bpd, but given its low levels, JPMorgan estimates that any release from this source would fall below the bpd average seen during the Russia-Ukraine conflict in 2022.

Even if there is enough oil to go around, the impact on prices tends to be more muted than you’d think. The US Treasury estimated that the US release in 2022, combined with IEA aid, helped lower the price of gas by just $0.17 per gallon.

Bottom line: The numbers prove that the IEA can't cover the full loss of oil while the Strait of Hormuz is closed. No matter what happens, there's going to be a shortage, so don’t be surprised if you feel some pain at the pump before your next road trip.—JD