FILE PHOTO: Crude oil storage tanks are seen from above at the Cushing oil hub, appearing to run out of space to contain a historic supply glut that has hammered prices, in Cushing, Oklahoma, March 24, 2016. Picture taken March 24, 2016.
Nick Oxford | Reuters
Supply measures alone won’t be enough to mitigate “the largest supply disruption in the history of the global oil market” amid an escalating conflict in the Middle East, the International Energy Agency warned on Friday.
Instead of waiting for disrupted production to recover, lowering demand could ease pressure on consumers and help bring prices down more quickly.
Minimizing road and air transport, working from home where possible, and switching to electric cooking could significantly help cushion the shock for consumers, the agency said.
Heightened geopolitical risk has rattled traders, sending not only crude prices higher but also sharply increasing costs for refined products such as diesel and jet fuel, which directly impact transportation, logistics and consumer prices.
Oil prices have surged more than 40% since the start of the U.S.-Iran war on Feb. 28, reaching their highest levels since 2022 as supply has been severely disrupted, mostly due to the effective closure of the Strait of Hormuz.
The strait is a narrow maritime corridor off Iran’s coast that connects the Persian Gulf and the Gulf of Oman and normally carries about a fifth of global oil consumption.
Countries have already begun tapping strategic petroleum reserves, with hundreds of millions of barrels slated for release.
The IEA last week agreed to release 400 million barrels of oil to address the supply disruption triggered by the Iran war — the largest such action in the organization’s history — without providing a timeline for when the stocks would enter the market.
Lowering oil demand
While policymakers continue to manage supply disruptions, coordinated efforts to reduce consumption could provide the fastest relief.
“Addressing demand is a critical and immediate tool to reduce pressure [on] consumers by improving affordability and supporting energy security,” the IAE said Friday, as it laid out a range of measures that can be taken by households and businesses to lower demand.
Among the most impactful steps are encouraging remote work where possible, increasing carpooling and public transit use, and cutting back on non-essential air travel.
Measures focus primarily on road transport, which accounts for around 45% of global oil demand.
Working from home where possible reduces fuel demand for commuting, while lowering speed limits, shifting from private cars to public transport, and alternating private vehicle access in cities, could further reduce congestion and fuel consumption, the agency said.
Measures to shift liquefied petroleum gas (LPG) use away from transport and towards essential applications like cooking can also help keep prices lower, as can adopting alternative clean cooking solutions that reduce reliance on LPG.
Taxes
Countries are also looking to fiscal measures to ease the pressure on consumers and prevent sharp rises in fuel prices that could add to inflationary pressures.
Spain is planning to reduce the value-added-tax (VAT) on fuel to 10% from 21%, according to a local media report citing sources familiar with the matter. The government will also eliminate a 5% tax on electricity, according to the report.
Italy on Wednesday cut excise duties on fuel, while Germany’s finance ministry has said it is looking at ways to shield consumers from rising fuel prices, such as introducing a windfall tax on oil companies.
Early Friday, international Brent crude futures with May delivery rose 1.3% to $109.93 per barrel, while U.S. West Texas Intermediate futures with April delivery traded largely flat at $96.20.
— CNBC’s Sam Meredith contributed to this report