The World is Running Out of Fuel

since the war in iran has been going on oil prices have been going up but they actually haven't gone up as much as people thought how high are oil prices right now they are high but they could be higher and something that's been stunning to a lot of people is why isn't it higher based on what's happening in the extent of the disruption that's our colleague benoit moren who covers the oil industry you know for most of the year people are like oh we're gonna drive off the cliff and then we're like oh actually wheels feel on the ground we're okay could be worse for the last few months the world has found workarounds to keep the worst case scenario at bay by doing things like tapping strategic reserves or releasing sanctioned oil but now it's starting to look like the world is running out of those band-aids and oil executives are ringing the alarm the prices are about to go up we've bought time for the past you know six months and now time has finally run out right all the solutions are finally gone right and people are again talking about oh we're going to be potentially hitting you know tank bottoms which is when crude levels are so low in tanks that you cannot you literally cannot pull it out i mean this sounds bad it is pretty bad it is pretty bad and i was at a conference just uh you know a couple of weeks ago and when i was running into a ceo that i knew or an alice i asked them is this it like it's just the turning point it's just inflection point it's just the driving of the cliff and everyone said yep this is yes this is it so welcome to the journal our show about money business and power i'm ryan knudson it's monday september 21st coming up on the show the fuel crisis is finally here this episode is presented by intuit credit karma relaxation doesn't always look like spa days or fluffy pillows sometimes it's simpler than that it's when those pesky tasks you don't have time for like hunting down your credit card perks are handled for you like how card 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help get your job the premium status it deserves at indeed.com slash podcast just go to indeed.com slash podcast right now and support the show by saying you heard about indeed here indeed.com slash podcast terms and conditions apply hiring now then this is a job for indeed sponsored jobs when iran shut down the strait of hormuz at the start of the war it prevented about 20 of the world's oil from reaching the market it's supremely important and it was known that if iranians for some reason decided to shut down the strait this would have massive ramifications for the global economy you know when trump administration struck some of those iranian sites people were like oh what if iran decides to close the strait but it was really seen as the nuclear option one that no one wanted to see because it would be so bad for everyone involved as soon as the strait was closed oil prices shot up they rose from around 70 a barrel to well over a hundred but soon markets found a number of workarounds that stabilized prices first the u.s government tapped into what's known as strategic petroleum reserves massive storage sites filled with backup oil that the u.s has held on to for decades just in case that's been in place since the after the arab oil embargo of the 1970s and as a result of that the u.s decided that it'd be a really good thing to have a bunch of crude stored up in uh and salt caverns on the gulf coast that you could tap into if something like that was to happen again and it's not just countries that have oil reserves like this i understand companies have them too you have commercial stocks as well right and those are something that you know refineries and other companies that have oil reserves that have oil reserves can tap into and those levels were really high going into the conflict so people could look at it and say okay we have good buffers when the u.s government and companies tapped into those reserves earlier this year it helps slow the rise of oil prices traders and you know alice looked at and said okay that's good we have like a response we have one buffer it's not going to be enough to see us through this crisis if it goes on for too long but provided that it is short as the administration is saying we will be maybe okay we're going to have a glut of oil this year so hopefully we're not going to be you know hitting tank bottoms right we'll have enough to see us through this strategic reserves aren't the only buffer that has helped to ease some of the price pressure another one is actually coming from illicit oil there's a giant glut of sanctioned oil tankers sitting at sea that was produced by countries like iran and russia the u.s had sanctioned that oil making it unavailable the most of the market in march though the u.s temporarily allowed other countries to buy this sanctioned oil so you know if a refiner wants to get a delivery of oil from a russian dark fleet tanker it can do that right the third buffer has to do with china china is the world's biggest oil importer it typically buys around 12 million barrels of oil and it's not going to be enough to see us through this crisis but earlier this year china stopped buying so much they pull back by something like three million barrels so that's freeing up a bunch of barrels that other countries were then able to get their hands on and that's a big deal when you think about how many barrels were not leaving the straight of our moves right so what was the uh overall impact that these buffers had on the price of oil around the world it contained oil prices it made it so that they didn't shoot up all the way to you know 130 bucks or 140 bucks a barrel which is this doomsday scenario that people were concerned about and thanks to all those buffers that we just got into this did not come to pass instead crude oil has roughly stayed under 100 a barrel and it's kept a lid on gas prices too which have hovered around a national average of just under five bucks in june that prediction appeared to be coming true when the u.s and iran began peace negotiations and agreed to a ceasefire and people think oh finally this is what we've been calling for this might be the end of it finally and alice at the time were doing this whining we're going to have too much oil and oil prices are actually going to fall to 70 bucks a barrel and maybe as low as 60 bucks a barrel so we've completely whipsawed you know in just a matter of of months but that didn't happen instead the peace deal fell apart just weeks later here we go again iran reportedly closed the strait of hormuz following israeli attacks on lebanon today by tensions in the region remain high today iran said the strait of hormuz will be closed again after iran accused the u.s and israel of violating the memorandum of understanding president trump says he considers the ceasefire with iran over we hit him very hard last night very very probably hit him hard again tonight i'll give him a little warning we're gonna hit him hard tonight so now we're kind of almost back to where we were when this conflict started the strait of hormuz is closed some oil supplies are still cut off from that region how have those buffers been drawn down day after day the last six months how much is left so if you think about it we're exhausting commercial inventories we've tapped strategic reserves so that's you know national stocks mostly in the u.s and there's only so much you can tap after this and what's happened is that you've drained all of those buffers month after month after month of this crisis not being resolved there's no more you know fanciful scenarios of this could be over tomorrow it's not going to get worse this is finally in the rubber hits the road so far the u.s has taken out over a hundred than 30 million barrels from the Strategic Reserve. There's still some 280 million barrels left. That might sound like a lot, but the government has only authorized the release of a certain number of barrels, and it's getting closer to hitting that limit. And this time around, there's an additional problem. The industry is now also facing a refinery crisis. You've had, you know, strikes on refineries in the Middle East in the context of this war. And at the same time, Ukraine has taken off a bunch of refining capacity in Russia as part of defending itself. And, you know, Russia is the world's second largest exporter of diesel, which is a really important fuel that, you know, trucks use and that is used to ship goods around. It's really the lifeblood of the economy. And so that's added on to the shortage in the Middle East. And if the refinery is out, if it's been damaged, you're looking at months to, put this back on. So right now, there's just not the capacity in the refineries to produce the fuel that the world needs. The Trump administration has been talking about how Venezuela will be a solution to this problem, that we can start producing oil there to use in the U.S. How soon could all of those reserves come online? So the reserves are there. That's probably the largest such reserves in the world. The issue is that it's going to take a long, long time to get there. And I think that's going to take a long, long time before you significantly increase production in Venezuela. Actually investing the money, bringing in the rigs, hiring people, drilling and shipping those barrels out. You're probably talking about really years and billions and billions of dollars of investment before you see meaningful ramp up in production in that country. Are there any other just miracle solutions on the horizon? Not really. What you can hope for, maybe it's just a little, you know, very small miracles. Benoit says those small miracles are things like if China decides to ramp up diesel production or if refinery repairs are finished ahead of schedule. That could provide some relief. But again, this is not a tomorrow fix. American consumers aren't seeing prices skyrocket at the gas pump yet. But where it's really going up is in the price for diesel. That's what powers the largest gas pump. There are large trucks that move most of our consumer goods from one end of the country to the other. That's for mostly shipping, you know, trucks. And so the question is, do we see some businesses cut down on deliveries, for instance? Or when do they actually, you know, pass through those costs to consumers? And if the price of diesel goes up, that's a higher cost that all kinds of businesses need to factor into their prices. After the break, how business owners are managing. There's no place like Chrome. Check responses, setup required, compatibility and availability varies 18 plus. Hank joined BJ's Wholesale Club the day he became a father of 30. I coach football. Now Coach Hank saves up to 25% off grocery store prices. 30 pounds of pasta, 3 cases of protein bars, 75 sports drinks. And that's just pregame. He knows teamwork and BJ's knows savings. This is your home, Coach. Home of the save. Join for just $20 at BJs.com. Mesquite and save 10 cents per gallon for six months. Open soon. Limited time offer. New members only. BJ's, home of the save. Of all the things that are causing inflation to go up right now, how big of a deal are fuel prices for American companies? For a lot of these U.S. companies, you know, fuel is the thing. That's our colleague Owen Tucker-Smith. He's been hearing from businesses on how they're navigating the growing oil crisis. They're quite frustrated. I mean, now, you know, it's been many months of this, of a conflict that a lot of these businesses were hoping they could wait out for just a couple months. Especially considering, you know, there's been all this messaging from the administration about fuel costs coming down tomorrow. And so a lot of these businesses are now kind of reaching, I think, a breaking point. Businesses essentially have two choices when fuel prices go up like this. The first choice is to sell. To hold the line. To wait it out. And keep prices where they are. Owen spoke with one business owner that's taken this route, a farmer named Jim Barber. He's a third-generation farmer in rural Pennsylvania. And, you know, he has only, in the past five years, increased his beef prices around once. So he's very against price increases, even when he sees the costs that he pays swing up and down. He really cares about his relationships with his customers. And so even though the cost that he's paying to get, for instance, hay trucked in from a few counties away is up, you know, 15, 20 percent, he's just going to eat that for now. How important is fuel to a farmer like him? It's extremely important. You know, a lot of these farmers are, A, paying for fertilizer, B, they have high transport costs, they're shipping in hay, and C, they're often, you know, paying to ship their own things. So you might be paying energy costs, you know, three or more times. In Barber's case, he believes the conflict in the Middle East will be resolved soon. And it's just a little bit longer before we're out of the woods and oil prices come down again. So he'll have a little bit less profit, you know, on the items that he sells, the milk, the pork, the beef. But, you know, the way he thinks about it is, this is a thing that you do now so that customers continue. And when this ends, you'll be rewarded for it, for being the guy that, you know, stuck it out. Can you talk generally about businesses that are deciding to keep their prices low and absorb these higher costs? Like, what is the calculus that they're making generally? The calculus is often, you know, that they know how stretched consumers are. And especially middle and low income consumers. They are trying to compete. For a limited number of them. And so they want to be, you know, the lowest price in the crowd. You especially hear this from companies like Walmart or Kroger or these big box retailers that are selling to the mass market. Whenever they can, they will advertise their rollbacks of prices. So the calculus here is, will it hurt your profit right now? It might, but it might also increase your sales. And maybe even increase your market share. Against companies that are raising prices. Absolutely. But not all businesses are willing to eat the cost. The other approach is passing some or all of the higher prices on to their customers. One company that's doing this is called Ambix. It makes plastic components. They use resin, which is an important chemical compound that is very important for plastics. It's made from oil. And so when this kind of. If this kind of thing happens and oil prices skyrocket, the cost of resin goes up too. And some of their costs were up 30, 40, 50%. And that's just not a thing that they could handle for too long. Ambix says it was resistant to raising prices at first. But as the war in Iran dragged on, that started to change. So now, when their suppliers tell them we're hiking prices 60 cents, that 60 cents is going to go to their customer. So you're starting to see, I think, some of these firms that for a while did want to keep prices stable start to buckle a little bit and start passing it along. Was there a moment when these businesses started to buckle? I think for a lot of businesses, there was this moment of optimism this summer when energy prices were starting to fall again. And there almost was a little bit of a feeling like maybe we're getting out of the woods. And then in August, tensions picked back up again. And the price of fuel picked up again. And, you know, we recently had $6 diesel. And I think that's when some of these businesses and economists started to realize, like, these price shocks are starting to really embed themselves into the economy. With no end in sight for the conflict in Iran, all anyone can do is try and navigate the uncertainty. We just got J.P. Morgan, commodity analyst, like, put out this article. And they were saying, we don't even know how to model this anymore. Like, there is no baseline because you can't see around the corner here. It's almost not worth predicting. I think it's just a really sort of interesting moment for the economy right now. It is healthy on paper on a lot of levels. And yet consumers feel so bad about the prices that they're paying. And I think, you know, for businesses, the question is, is, you know, how long is this going to last? It's not really clear to the oil executives or the politicians or the CEOs right now. That's all for today. Monday, September 21st. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Colin Eaton. Thanks for listening. See you tomorrow. The Devil Wears Prada 2 is now streaming on Disney Plus and Hulu. We are digital. We are downloadable. We are streamable. The fashion event of the year is certified fresh. Pull yourself together. We have work to do. Critics say it's smart and witty and the perfect sequel. That's all. Get runway ready. For The Devil Wears Prada 2 on Disney Plus and Hulu. Rated PG-13.