Six months of war with Iran have demonstrated perhaps why other leaders before U.S. President Donald Trump were so hesitant to get tough with the Islamic regime, with the world having witnessed the largest oil supply disruption on record.
Yet the global energy system has so far avoided the kind of total breakdown analysts initially predicted.
Donald Trump Back in 2016. Image Credit: Creative Commons.
But that resilience is getting harder to maintain, and may not last much longer.
Where We Are Now
Per Reuters, countries directly affected by conflict produced roughly 45 million barrels of oil per day last year, representing more than 43% of global supply.
At the same time, the wars in Iran and Ukraine have knocked out a significant chunk of refining capacity and disrupted major shipping routes. And now, governments are being forced to release huge quantities of oil from emergency stockpiles.
For the last six months, the world has compensated.
Oil has been moved out of strategic reserves and commercial reserves, Gulf exporters have found ways to reroute shipments and move oil through alternate pipeline systems, and American and Indian refineries have increased exports.
Higher prices have been somewhat mitigated by reduced demand in some places.
But those buffers are not sustainable, and they are now substantially smaller than they were when the war began on February 28.
The World Is Burning Through Oil Reserves
One of the main reasons the global energy crisis has been manageable so far is that governments entered the conflict with enormous quantities of oil stored in strategic reserves.
The International Energy Agency (IEA) has coordinated emergency releases among its member nations, and individual countries have drawn down their national reserves, effectively replacing some of the barrels that are no longer reaching international markets – and that has come at a cost.
This month, the IEA reported that global oil inventories had fallen by 410 million barrels since the beginning of the war, declining to just under 7.9 billion barrels by the end of July.
Inventories fell by 69 million barrels in July alone.
The American figures are shocking, too, with the Strategic Petroleum Reserve falling to 289.7 million barrels last week – its lowest level since November 1982, following the release of another 3.7 million barrels.
More coordinated releases are unlikely soon, with IEA Executive Director Fatih Birol confirming on Monday, August 24, that the organization is not currently discussing a second release from global strategic reserves.
Demand Side Effects
Not all of the global adjustments made to address the supply shortage have come from the supply side.
Expensive fuel and shortages have also forced businesses and consumers to use less energy, thereby reducing the amount of oil that the world needs.
According to the IEA, global oil demand is expected to shrink by 1.6 million barrels per day this year, with demand falling by an estimated 4.9 million barrels per day year over year during the second quarter of this year.
It is also expected to remain 2.8 million barrels per day lower during the third quarter.
That demand reduction is helping to prevent an even larger shortage, but it is by no means a victory for the West or for Washington, and it is certainly not a long-term solution.
Speaking on Tuesday, IMF Managing Director Kristalina Georgieva said the global economy has weathered the shock better than expected, in part because consumers are conserving energy, alternative suppliers are increasing production, and some countries have also returned to using coal.
But she also warned that the inflation being driven by the supply shortage, as well as government borrowing costs, still poses a major threat.
What that means is that one of the major mechanisms that is keeping the global oil market functioning is the economic pain caused by the supply shortage itself – and not because the world actually needs less oil.
What Happens After Six More Months?
The real danger now is what might happen if the war continues through the end of the year and into 2027. The global energy system cannot keep functioning under this kind of pressure, but it has so far because of the measures outlined above.
Now, reserves are running low, and refining capacity matters less if Iran follows through on its threats to stop all oil from leaving the Persian Gulf.
Six months later, the global oil market’s flexibility has largely been used up.
By early 2027, the consequences could extend far beyond higher pump prices.
A prolonged shortage now could force governments to begin rationing fuel – as is being seen throughout Russia – and prioritize critical industries and transportation. It could lead to further subsidies and major shortages of diesel and aviation fuel.
The kind of damage being seen in Russia today could quickly arrive in the West – and there’s no telling how long it could last.
About the Author: Jack Buckby
Jack Buckby is a British researcher and analyst specializing in defense and national security, based in New York. His work focuses on military capability, procurement, and strategic competition, producing and editing analysis for policy and defense audiences. He brings extensive editorial experience, with a career output spanning over 1,000 articles at 19FortyFive and National Security Journal, and has previously authored books and papers on extremism and deradicalization.
