IEA intervention fails to curb rising energy prices

The decision to release 400 million barrels of oil from the strategic oil reserves has not yet calmed the oil market. Due to the conflict with Iran shipping through the Strait of Hormuz has largely come to a halt. Energy prices continue to rise, increasing pressure on the global economy and food chains. The members of the International Energy Agency (IEA) decided last Wednesday, March 11, to release 400 million barrels of oil from global reserves onto the market to stabilize the oil market. The war in the Middle East is causing the largest disruption of supply in the history of the global oil market, said the IEA. However, the oil market continued its upward trend, with the price per barrel rising above $100 per barrel again on March 12. On March 15, prices reached $106.19 per barrel. At the time of writing, Brent crude oil stands at $101.95. This means that the oil price has increased by 39.9% since February 27 (the day before the US and Israel attacked Iran). The diesel price peaked at €186.55 per 100 liters on March 9 from 4,000 liters (LTO member price). The next day it was €9 lower, but the price is climbing again. Today, the price stands at €177.80 per 100 liters. The gas price also reached a recent high on March 9 at €56.45 per MWh. The price dropped on March 10 and has been rising again since then. Gas is currently trading at €51.58 per megawatt-hour, an increase of 61.4% since February 27 (€31.96 per MWh). The key to a stable oil and gas supply remains the resumption of shipping through the Strait of Hormuz. Adequate insurance mechanisms and physical protection for shipping are essential for the resumption of supply, states the energy agency. Donald Trump urged NATO partners in an interview with the Financial Times to help the US secure shipping through the Strait of Hormuz. Various partners, including the Netherlands, have shown limited willingness to participate. Trump is also trying to pressure China by threatening not to travel to China at the end of March. The Strait of Hormuz is de facto impassable. Today, another tanker in the area was hit according to UKMTO, the British organization that monitors maritime safety. In addition, Iran has also targeted oil and gas facilities in the region. For instance, the Shah gas field in the United Arab Emirates was shut down after a drone attack, as well as the Fujairah Oil Industry Zone, one of the largest storage hubs in the world. The cabinet is not concerned The Dutch cabinet is currently not acutely worried about supply security or physical shortages of both oil and gas in the Netherlands and considers it unlikely that there will be a price escalation comparable to the energy crisis of 2022. Furthermore, there are mitigating factors. An increase in LNG supply from the US is expected, and many Asian countries are switching from gas to coal. The Dutch government also expects that the price peak will be limited by jointly releasing 400 million barrels of oil from strategic reserves together with 31 other IEA member states. For the Netherlands, this amounts to over 5.36 million barrels. Additionally, several OPEC countries want to increase their oil production starting in April. The cabinet also points in a letter of March 16 to the possibility of redirecting part of the production from the region via the East-West oil pipeline in Saudi Arabia and the Abu Dhabi pipeline in the United Arab Emirates. The letter does not mention that Iran is targeting the country's oil infrastructure. The cabinet also states in the letter to Parliament that 25% to 33% of the globally traded raw materials for fertilizer production, such as sulfur, urea, and ammonia, come from the Gulf region. The production of fertilizers is also very energy-intensive, and the higher energy prices have a strong impact on prices. This can subsequently lead to higher global food prices indirectly. The CPB has calculated two scenarios where in the first scenario, inflation would be 0.6 percentage points higher at 2.9%, and in the second, 1.5 percentage points higher at 3.8%. The conflict also harms the overall economy. The longer the Strait of Hormuz remains closed, the greater the hindrance to economic growth. Rabobank outlines three scenarios for energy prices and economic growth. In the baseline scenario, the bank assumes that the conflict will last a few weeks and that the Strait of Hormuz – through which about one-fifth of the global oil and gas flows pass – will be only partially and temporarily closed. The oil price would average $86 per barrel in March and April, while gas on the TTF futures market would cost an average of €52 per megawatt-hour, after which the price would begin to drop again starting in summer. Economic growth would be at 1.4%, slightly below the 1.5% expected before the conflict. In the second scenario, shipping through the strait comes to a standstill, resulting in severe shortages in energy markets. In the third scenario, major oil refineries and gas facilities in the region are so heavily damaged that they remain out of service for years. In Rabobank's bleakest scenario, the oil price rises to $150 per barrel and gas to €125 per MWh. The prices would remain above the level of scenario 2 for years, with oil above $110 per barrel and gas above €100 per MWh. The Dutch economic growth would drop to 0.6% this year in this scenario. Possible measures The Dutch cabinet had promised the House of Representatives to outline the possible mitigating measures for high energy prices. The measures the cabinet is looking at include: an energy allowance, an energy price cap, temporary reduction of energy taxes and fuel excise duties, increase of the tax-free travel expense reimbursement, increase of housing allowance, and increase of the minimum wage. For entrepreneurs, the cabinet has already agreed in the coalition agreement to extend, increase, and expand the Indirect Cost Compensation (IKC), which energy-intensive large consumers of electricity already receive. Additionally, a budget will be allocated for compensation of electricity prices for companies starting in 2028. Electricity price Roughly half of the electricity is currently generated sustainably in the Netherlands, but gas remains important for production, especially at times when there is little wind and solar energy generated. The electricity price on the EPEX SPOT ranged between €143.87 and €68.47 per MWh over the past week.