AYESHA RASCOE, HOST:
The price of a barrel of oil peaked at over $125 last week, its highest level in more than four years. The uncertainty over a deal to end the war in Iran and the surprise move by the United Arab Emirates to leave the oil cartel OPEC is all part of this market volatility. Joining us now to help untangle the complexities of the oil market is Kevin Book. He's the co-founder of the research firm ClearView Energy Partners. Kevin, thank you so much for being here.
KEVIN BOOK: It's great to be here with you.
RASCOE: All right. Let's start with the supply of oil. We know the war has trapped oil tankers in the Persian Gulf, but is there really less oil being bought and sold in the world?
BOOK: The answer is, at least according to the International Energy Agency, yes. It's down by about 2 million barrels per day from their prior estimate. Some of that is supply-constrained demand. Simply, the supply isn't available to buy, so people can't buy it. But the point is that the supply isn't coming necessarily from production, like it used to. A lot of those barrels are coming out of inventories - commercial inventories and government stockpiles.
RASCOE: Are there other demands on the world's oil supply that are making things tight right now?
BOOK: Well, the world is still trying to go on as it has before. And so prior to the start of the war, it was consuming about 104 million barrels per day. It's now consuming about 102, again according to the International Energy Agency. We are at the point where demand is outstripping supply, for sure, because we're missing more than 10% of the supply that used to come from the Strait of Hormuz. Some of those barrels have been diverted to the Red Sea. Some of those barrels have been supplemented by government stockpiles, but there's still an enormous hole in supply. And so demand is right now causing suppliers everywhere to draw down inventories, and in some parts of the world, supply isn't showing up at all.
RASCOE: And so let's go with, like, a best-case scenario of a quick end to the war in Iran. How long will the world's oil prices stay high and why?
BOOK: Well, depending on how long the strait stays closed, prices could go higher. There's a strong inverse relationship between inventories and prices. And when inventories are low and you can't get oil out of the ground or out of the strait, you should expect prices to keep rising at least until demand capitulates and starts to contract. So we may be weeks or even months, depending on how long the strait stays closed, from the peak of prices from this crisis. And then from there, we could be many months longer still for the ships that are trapped to get free, for the facilities that are damaged to be repaired and, for that matter, for the inventories to be replenished before we see something like a price we previously thought as normal.
RASCOE: So the quote-unquote normal price, where we were before this crisis - that likely will be - you know, do you think that we could be back to that by the end of the year if things go well by - you know, by the end of the summer?
BOOK: Now, Ayesha, it's a funny question to ask because the answer that you might think you'd want to hear is that it'll be back to below-$3-a-gallon gasoline really soon. But given the fundamentals I just described, if the prices were to fall really fast in a hurry, the reason would probably be a bad one, not a good one. It would probably be recession undercutting demand, knocking the knees out from under the market. And so, no, probably not back to what we thought of as a normal price before all this before the end of the year. And if it does happen sooner, it may not be good news.
RASCOE: A major oil producer, the United Arab Emirates, is leaving OPEC, presumably to pump more oil. How significant is this move?
BOOK: Well, it's significant in a lot of respects. One of the points that I think is worth making is that wars have a tendency to accelerate existing trends, and the Emirates had been butting up against OPEC's limits for several years. They had been granted three modest accommodations to try to exceed the quotas the group allowed them, but they wanted to produce more, and this seemed like an opportunity for them to focus on their own economic goals. But their departure is a significant one because they're one of the biggest players in the producers group. They've been a member for more than six decades. And they raise questions about how effectively that group will be able to balance the market in the future.
RASCOE: You know, I covered energy markets for many years. And when gas prices go up, people get very angry. Oftentimes, you have oil executives who will be brought in before Congress and yelled at. And the question that will be asked of them is - this year, oil and gas companies have been hugely profitable. Are there steps that they could take to lower the prices at the pump?
BOOK: Yeah, they're getting those questions probably right now, just like they did from the last president. The answers, unfortunately, are usually that there aren't a lot of good solutions that either the companies or, for that matter, the governments can provide to lower the price. It takes a while to bring production on stream, and now we're looking at a point where demand itself is a question mark. If this crisis keeps going and the prices keep rising, the same companies that are benefiting from the short supply in the market could be facing a recession that undercuts those profits in the next year.
RASCOE: That's Kevin Book, managing director of ClearView Energy Partners. Thank you so much for joining us.
BOOK: Thanks for having me.
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