Overall impact and aftermath

3.9Overall impact and aftermath

While closure of the Strait would result in an immediate loss of 15 million barrels per day, the ability of the industry to draw initially on stocks built up in the period prior to the event, on surge production from countries outside of the Middle East, and on stocks released under policy measures such as IEA collective action, would limit the total shortfall and potentially remove the shortfall altogether in the initial weeks. If shipping could be reinstated within two to three weeks, there would be no net impact on supply to world refineries. The main impact would be on price increases in the market in the weeks leading up to the closure, a significant price spike in the week of the closure, a fall in the price as strategic stock draws occurred and an elevated price for a period after the event while countries rebuild stocks (see Appendix C for a full discussion of these points).

The IEA allows member countries to rebuild stocks over a 12 month period. In reality, it is possible that stocks would be rebuilt in less time than this. Table shows that both industry and government drew down stocks during the fourth quarter of 2005 partly in response after Hurricane Katrina. However, stock levels had fully recovered by the second quarter of 2006.

Table OECD industry stocks during and after Hurricane Katrina

Data source: IEA Monthly Oil Market Reports.

Factors that affect the rate of stock rebuild include the production response to the higher prices generated by the closure, the duration and extent of the price rise, and the general political and industry climate following the closure. Industry participants will be discouraged from building stocks while prices remain elevated. However, some producers would have been able to benefit from the higher prices during the event and replenish them at a lower price after the event. Expectations of the risk of further disruption of supplies would also influence the rate of stock replenishment in the months following conclusion of the event. In order to balance these factors, it has been assumed that IEA stocks would be rebuilt over a period of 16 weeks.

4The shock sequence

There are a range of possible scenarios that could have been chosen to assess the impact of a blockage of the Strait of Hormuz. Any scenario would involve a range of political, military and economic interests from a number of countries. It would be impossible to accurately and definitively determine the manner in which a particular scenario would play out. Predicting geopolitical events, military strategy and the military capabilities of individual nations was outside the scope of this project.

The scenario that was provided by the Department represents one plausible case. It was based on advice from a range of credible sources to represent an outcome that, while unlikely, is nevertheless considered among the most plausible. An assumption regarding the nature and extent of collective action by IEA countries was developed in consultation with the IEA. It recognises that full knowledge of the duration and scope for the blockage would not be known at the time of announcing collective action.

The economic impacts have been estimated by comparing two price elasticity cases under each of two Australian refining scenarios with a relevant reference or base case scenario. The reference case is assumed to be the outcomes that would have arisen if the concerns over blockage of the Strait of Hormuz had not arisen. Under this case, it has been assumed that crude oil prices would have remained broadly at the levels that had arisen at the end of January 2012. At this time, dated Brent crude oil prices were around $110 per barrel.

As discussed elsewhere the Brent crude had been trading around $110 since November 2011 but had been elevated since around March 2011 over concerns over supply disruptions elsewhere. While there may have been some impact on the price associated with concerns over Iran, the price did not commence a consistent upward trend until around the beginning of February. ACIL Tasman has assumed therefore that the price of $110 per barrel in January reflected concerns over supply disruptions other than the threat to passage of oil through the Strait of Hormuz. For the purpose of modelling therefore, ACIL Tasman has assumed that the event envelope for the disruption commenced on 1 February when the price began a steady rise from around $110 per barrel.

It has also been assumed that total oil demand would have been around 88.9 Mb/d as projected by the IEA in its oil market outlook for March (IEA, March 2012).

While other factors such as inventory rebuilding, international oil refinery closures and demand changes might have led to different outcomes, it has been assumed that these price and production assumptions would have applied under the reference case.