President Donald Trump’s war in the Middle East is restricting the supply of crude oil to the rest of the world.
Iran’s new leader said Thursday that the country will keep the Strait of Hormuz closed. Oil prices jumped in response. Brent Crude, which is basically the type of oil that’s no longer flowing out of the Mideast, flirted with $100 a barrel.
Even with more than 170 million barrels of oil being released from the Strategic Petroleum Reserve, some of the refineries that convert crude oil into consumable energy just don’t have access to the raw material they need. The war could end up causing many refineries to shut down production.
The kind of oil that’s getting cut off by this conflict mostly goes to Asia.
“A lot of that crude goes to China, Malaysia, Singapore. India is very important also,” said Anna Mikulska, head of analytics at CGCN Group.
She said some Middle Eastern crude also heads to refineries in California.
“California has imported a lot of its crude from Iraq, for example. This is a lot of barrels that California will have a problem replacing,” Mikulska said.
Refineries there can’t just switch to the heavier, sulfur-rich oil that comes from western Canada, because they aren’t set up to handle it.
“You have to build the infrastructure, you need the de-sulfurization infrastructure, and that takes a long time, and more importantly, it takes a lot of capital investment,” said Hugh Daigle, a professor of petroleum engineering at the University of Texas at Austin.
He said even though the U.S. produces a lot of its own oil around the Gulf of Mexico, California isn’t connected to that supply.
“The easiest way to move crude around, domestically, is pipelines. There’s not a lot of pipeline infrastructure to get from Texas to California, believe it or not,” Daigle said.
Refineries in California and Asia still have oil they can refine in the meantime. But Mark Broadbent, research director of North American oils at Wood Mackenzie, said there is a point when that will start to dry up.
“You need to keep a certain amount circulating through your units in order to keep them online. At that point, you’ll be looking at refineries that are going to shut units down, because there’s simply not enough material to keep them running,” he said.
Broadbent said even if the war were to be over soon, and oil started flowing through the Strait of Hormuz again, it could take a while for those refineries to come back online.
If they partially shut down, he says it could take one or two weeks.
“And if you’re looking at the whole refinery down, then yeah, that becomes more like a month, one-to-two month process, in terms of starting up the entire refinery,” he said.
Refineries would likely want to turn the lights back on as quickly as possible, because demand for fuel and fuel prices are both still high. Which means refinery profit margins are up.
“So that’s a huge incentive for refiners to keep running as much as possible,” he said.
Energy prices are likely to stay high, Broadbent said, even if the war suddenly ends.