Perception and Physical Supply Both Affecting Oil Prices: Economist

But more on the International Energy Agency's release of barrels of strategic oil from reserves. Joining us now is Michael Bussler, economist and public policy analyst and professor of finance at Stockton University. Michael, always great to have you on the show. Good afternoon. So this release is the largest, largest ever by IEA nations. Can we get your overall thoughts, So because of the war in Iran, the Straits of Hormuz are essentially shut down. Now, the President Trump says he's going to try to keep it open. But I think three British ships got hit today trying to pass through there. So there's a lot of reluctance. And most ships won't go through there. So how much does that hurt? About 20 million barrels a day flow through the Straits of Hormuz. And that's about 20% of the world's total supply. So 20 million barrels a day not getting through, and they released 400 million. So that's about a 20 day supply. So that should help to stabilize prices. And the hope is that within that 20 days, either the Straits of Hormuz will be secured and ships will go through there, or even further, maybe this whole war in Iran will be over. Either way, this does a lot to help keep prices down. Now, it'll take a little while for it to filter through. And we don't know how long this Iran conflict is going to last. But in 2022, they released a little less than half of that, about 180 million barrels when Russia invaded Ukraine. And that did tend to help stabilize prices. So it's a positive move in the short term until this Iran conflict is resolved. So Michael, you said this might take some time to filter through. I have some thoughts on that, because JPMorgan Chase wrote in a note yesterday, it said once a presidential order is issued to deploy oil from the National Reserve, the Energy Department typically doesn't begin deliveries for about 13 days. And then on top of that, additional shipping time is needed before volumes actually reach end to consumers. And the war actually could be over by then. What are your thoughts? So the IEA doesn't know, as really nobody does, how much longer this is going to last, this war, and how much longer the straits are going to be blocked. So the IEA says, yes, I realize there's a week or two until we can get it out there, and then we have to ship it. It's going to take some extra time. But there is a possibility that this stretches on somewhat longer. President Trump's estimate was about four to six weeks. Now we're only about a week and a half in. He seems to be a little more confident that this will end in a shorter time period. But the IEA said, look, I want some kind of insurance here. If it does drag on, I don't want oil prices to go up over $100 or further, driving gasoline prices up. That's such a high price, it will tend to slow down economic activity worldwide. So you're right, this won't have an immediate impact. But should the war drag on, this will be somewhat of a buffer to help keep those prices down. So can I ask you how you feel about the spike in oil prices? Is this due to sentiment, such as fear? Or is it due to the physical disruptions? Because when President Trump said the war will end soon, a few days ago, we saw an immediate reaction to prices falling. That's why I'm thinking this. Yeah, so the answer is both. Some of it is due to a supply restriction, and some of it is due to the perception of oil traders that this conflict is going to go on for some time and prices will end up spiking. Now oil went up over $100 a barrel, Trump said, I'm going to secure the Straits of Hormuz, and it came back down to 90. Last time I looked, it was in the high 80s. So why did it go up so much? It was the original question. Restriction and supply, yes. And two, the perception that this is going to last longer than what even the President originally said. And if that's the case, they figure oil prices are going to go significantly higher, maybe up to $120 a barrel. So I better buy it now, even if I have to pay $100, it's better than paying $120 sometime in the future. Michael, in your mind, how long would it take for oil prices to normalize to the level before the war started? President Trump said he can end the war at any time he wants it to end. He told Axios this. So he can do that. His original goals were to wipe out the nuclear program, which they've already done, wipe out Iran's ability to shoot intercontinental ballistic missiles, which that's just about done, and then make sure that Iran doesn't fund any of these proxy groups. So most of that is done. The question is, what happens to the leadership in Iran? Now, originally, the goal was not a regime change. But where we are now, it looks like the only thing that'll work in the long term is to replace the mullahs that run Iran now with somebody who will encourage free and fair elections in the country. So again, we don't know how long this will last. And we don't know what the timing of all this is going to be. But this is a good first step to try to stabilize it. What we really need to do, Trump needs to get this war over with. He needs to wipe out what he wanted to wipe out, whatever he's going to do with regime change, he needs to do. As a tactical matter, you never say to your other side, well, I'm only going to fight till the end of next week, you know, that'll just sort of wait till the end of next week to do anything. So you don't want to tell them anything directly. But we do want to end this conflict as soon as possible. Once we do that, your original question, how long will it take for prices to normalize? I don't think more than about a week or two, once that oil starts flowing through. And since there's such a large supply being put on by the IEA, and now all these ships that were held up will go through the straits when the war is over. We could see the price of oil drop down below what it was before this conflict started. So there's a lot of variables here. And we'll just have to wait and see how most of these things play out. Right, that's right. We have to wait and see. But let me ask you one final thing. And I want to circle back to our initial topic here of oil releases. Now, we had a guest on yesterday who said the U.S. shouldn't be releasing oil from its strategic petroleum reserve, especially as he put it, the reserve has been reduced due to the previous administration releasing oil to lower prices. Can I just finally get your view on this? Yeah, I wouldn't release any more either. It's about at half, I think it's about 400 million barrels there, and it's just over half of what we're supposed to have. President Trump, when his first term in office, when oil dropped down to $20 a barrel or less, he filled the whole thing up. So it was very inexpensive for us to get our oil reserve up to where it should be. President Biden, mostly for a political move, wanted to get the price of gasoline down before the midterms in 2022. So he ended up releasing a lot of that. And now we haven't put it back. Oil is a little expensive now. You don't want to put it back when you have to pay $70, $80 a barrel for oil. But when the price comes down and things normalize, then you want to replenish that. We need that there in case of an emergency. We only have a little over half. If something really terrible happens and we need to pull it out, it's not going to be there. It's made to be there for emergency purposes. Having gas prices go up is not an emergency that we should use that for. Okay, well said, Michael. Always enjoy speaking with you. Thank you for your time. Always my pleasure.