We read today that senior industry figures say Irish households need to expect further electricity price rises in the coming weeks as the crisis in the Middle East continues. Why are we so susceptible to oil shock?
We tend to have a normalcy bias in all things. That is, if we haven’t had any problems for a long time, we tend to think that problems can’t happen, and that things will always continue as they have been in the recent past.
This is probably how the people of Iran – or the Sassanian empire as it was then called- felt in the year 633 AD just before a small Arab Muslim army invaded, established the Rashidun Caliphate, and changed everything forever.
Until Iran responded to American and Israeli military strikes on their homeland by shutting down the straits of Hormuz, nobody acted as if this was a possibility that could disrupt oil supplies.
In a recent conversation between market and energy strategists Amrita Sen and Jeff Currie on the EA Energy Forum podcast Jeff Currie on Iran, volatility and opportunities in undervalued assets | EA Forum Ep. 16, Currie explained how this prospect was dismissed out of hand by all.
Curry: “A friend of mine who was in government under Obama said they used to have oil crisis scenario planning exercises and they wanted to do a shutting-in of the Hormuz Strait, and Shell and everybody who participated said, ‘It will never happen. You don’t even need to do that.’ Well, it’s happened. And they’re completely unprepared.”
Well it happened and now we have a new normal. Whether the old normal gets reestablished or not is yet to be seen. It remains to be seen whether Iran would follow through with some suggested measures – such as suggestions to accept toll payment in bitcoin- which could permanently disrupt the global petrodollar system.
The response to the oil shock of 1973 was the establishment of strategic petroleum reserves, which does give a buffer to sudden supply shocks, which may recover in short time. But according to Curry, this new crisis is worse than the crisis of 1973 because, as he said in his Carlyle report, “we believe the world is more vulnerable to an oil shock today than it was in 1973, not less.” A crude awakening | Carlyle
The shutting of the straits of Hormuz and the restriction of one fifth of the world’s oil supplies has an effect whose impact is delayed only by the draining of reserves and the transit period of tankers on the sea. The transit times to get from the GCC countries to the Far East are approximately 22-28 days, and to Europe they are 25-35 days depending on which route is taken.
The effect of this flow restriction eventually does catch up at the destination’s end. Some strategists are saying that the markets are reacting with complacency borne out of a normalcy bias, but a report by Jeffries Financial Group put it that when these effects fully hit there will be “systemic effects for the world” Markets underpricing West Asia risks; oil shock could turn “systemic”, warns Jefferies
Bringing this all back home, we recently had Taoiseach Micheál Martin explaining on some softball national media program that blockades of refineries were “unconscionable” because it stopped the flow of product through refineries and the freeing of capacity for the crude that was still at sea. RTE gave the moist sympathetic of sympathetic ears, and didn’t push back in any way whatsoever (naturally).
“It’s unconscionable, it’s illogical, it’s difficult to comprehend,” said Martin in what looked like justification for the rolling out of some Justin Trudeau style strike breaking strategy. The RTE interviewer failed to ask whether he could also avoid the loss of this fuel to international trade by just relinquishing some of the tax take that his government banks with every litre of fuel sold.
This move would make it more possible for some of these hauliers and plant contractors to survive the next few months payroll and fuel payments. Without this relief, we are told by many in these businesses, they will go under. Surely that should be a consideration for our government, who has the ultimate control on prices because they take around half (usually 50-58%) of the cost of the price of fuel paid at the pumps.
Our Taoiseach painted the fuel protest as a hostage situation, and the tenor of this interview was a sob story in which the bad truckers and farmers are going to cause terrible harm which he can’t prevent. There is more than a little disingenuity in this claim.
Ireland’s case is a good specific case which illustrates how long the lag can be before the worst effects of this oil shock is felt regionally. In that interview the Taoiseach mentioned that we have a strategic reserve, the NORA reserves, which would last us ninety days. Take that, and the inventory in transit on the seas and how long that lasts, and you have an idea of the time lag between this being a worry and this being a catastrophe.
Many countries, such as some in South East Asia are more immediately susceptible to this shock. The Philippines are talking about fuel rationing and a four day work week. Think tank says 4-day workweek will drag growth – Manila Standard.
The thing is though, this is a slow moving disaster that affects every country in the world –even net energy exporters such as the United States will feel some effect as particular parts of the energy mix will always need imports.
It was envisioned that globalised markets would make diversified supply a security guarantee against regional supply shocks. However the obvious fault of this paradigm is that when it fails the ensuing problem is global, not local.
Part of the problem with this uni-global view of energy, was the underinvestment in liquid hydrocarbons and overinvestment in an energy transition which focuses on renewable energy.
While most Western countries were closing down extraction operations at the local level and shifting all expenditure to weather-dependent renewables, they were heavily reliant on oil imports from a monopolized global system.
This left the global market too exposed to a small number of chokepoints. Reminiscent of the global banking system and its crash in 2008, “too big to fail” actually means so big that failure is catastrophic.
These policies tie back to the petrodollar system; a strategic global economic system that ensures US financial hegemony, and the funding of US financial markets. What happens to this now? It is too early to tell, but the longer this Iran crisis continues the more likely it falls apart.
What can we in Ireland do to insulate from global supply failures?
First of all, we can diversify supply by opening up more localized oil and gas fields and investing in a secure national energy infrastructure -A diverse infrastructure that includes the extraction and processing, in Ireland, of the liquid hydrocarbons that we use.
If we had continued to invest in exploration and granted licenses for extraction off the coast of Ireland we might not be affected by the Iranian hit on the Qatar, LNG refinery. Qatar’s Ras Laffan LNG site may not be fully back online for months | The National
Increasing extraction in our own territories would mean abandoning one of the cornerstone policies of the Greens and the political mainline who have borrowed this senseless policy from them; but what doesn’t work should be discontinued
We could invest more in reliable energy and less in unreliable weather dependent renewable energy. Globally there has been decades of chronic underinvestment in fossil fuel infrastructure and massive investments in renewables. This has not prevented today’s crisis and may have actually contributed to it.
The IEA World Energy Investment report Executive summary – World Energy Investment 2025 – Analysis – IEA showed that in 2025 there was twice (2.2 Trillion as opposed to 1.1 Trillion USD) as much money invested in renewable and nuclear than in fossil fuels. Ireland in the past two decades has invested nearly all of its power generation capital in wind and solar, with minor spends on maintenance of existing gas plants and in the installation of flexible gas units.
Nuclear has promise, and is far less destructive to the environment than wind turbines. Countries that have invested in Nuclear have maintained energy security and of course have the smallest carbon footprint.
Nuclear powered France, for instance, has far less emissions and much cheaper electricity than renewable-obsessed Germany. Germany, under Green socialist madness, recently destroyed some of its last nuclear power stations, proving that Green policy is driven by ideology rather than evidence. It now has no nuclear power plants in operation.
But nuclear generation technology is developing in leaps and bounds and we should look into it as we plan our energy investments over the next decades.