Juan Cole Informed Comment
On Saturday, a projectile struck a Kuwaiti oil tanker in the Persian Gulf, such that five Indian seamen had to be rescued. On Friday another vessel was struck, causing a small fire onboard, but it was extinguished and the ship was able to continue on its way through the Strait of Hormuz.
Also on Friday, a Houthi drone hit a Saudi Aramco refinery at Riyadh. The extent of the damage is unclear.
In this volatile energy environment, Trump successfully strong-armed the European Union to release 100 million barrels of petroleum from its reserves over four months. Trump apparently hopes that this release will ease gasoline and diesel prices and help him in the midterms.
This step is unlikely, however, to have a big impact on gasoline and diesel prices. Europe is putting roughly 820,000 barrels a day on the market.
The world used about 104 million barrels a day of petroleum in 2025, though OPEC pegged it at 105 mn b/d. Global production reached 106 million barrels per day, which means there was a slight glut, and those reserves have helped the world get through the 2026 Iran War crisis.
So, folks, 800,000 barrels a day is very small potatoes. It is roughly the production of minor players such as Argentina or Colombia. It isn’t going to make much difference.
Moreover, the oil markets remain volatile because of the ongoing Iran and Ukraine Wars, as is demonstrated by the news items with which I began.
In Q2, the US Energy Information Administration estimated global production at 96.41 million barrels a day, down a whopping 10 million barrels a day from the same period in the previous year.
Kuwait and Iraq simply stopped producing petroleum from some fields last spring, because there was no prospect of exporting it through the Strait of Hormuz. Moreover, Iran lashed out at its Arab Gulf oil-producing neighbors over their close ties to and provision of bases to the United States. The Israeli and US bombardment of Iran and the Iranian revenge-sabotage of Arab Gulf state facilities did substantial damage to oil refining capacity.
It has been estimated that the Iran War and the Ukraine War together have taken 7 million barrels a day in petroleum refining capacity off the board. Even if other oil countries put more oil on the market and refine more, it is unlikely that the global oil producers have the capacity to make up for a 7 million barrel a day shortfall.
The major reason that the world did not face an even worse energy crisis than it did this past spring was that Chinese private firms released some of their massive petroleum reserves and cut back on imports. China was also able to cut 1.35 million barrels a day from its imports because 10 percent of the cars on its roads are electric. China, the largest oil importer in the world, slashed petroleum imports from roughly 11.7 million barrels a day to only 8.1 million barrels a day in Q2. But it can’t draw down reserves forever, and China is starting to come back into the import market, with imports back up to 8.9 mn b/d in August. China’s return has put upward pressure on global prices.
In Q3, global production was again off, though not by quite as much, at 100.27 million barrels a day. Again, that was about 6 million barrels a day that wasn’t being produced because of the Netanyahu-Trump War on Iran and to some extent because of Ukraine’s targeting of Russian oil and diesel refineries. In fact, it may be 7 or 8 million barrels short of what would have been being produced in 2026, since it was expected that global production would rise this year over the 2025 totals.
Photo of Galp refinery in Leça da Palmeira, near Porto, Portugal by Sebastien Devocelle on Unsplash
Because petroleum markets are inelastic, even small production shortfalls can cause major price spikes. If you lose petroleum supply, it isn’t easy to drill and replace it in the short to medium term. And, there is a limit to which consumers can cut back; if you drive to work you probably need to go on doing so even if gasoline rises in price by a dollar or two a gallon.
As for Q4, we are in the midst of two complex energy wars and nobody can tell what will happen. If things go bad in the Gulf, oil production could face shortfalls again. The US political elite seems still not to have gotten it through their heads that Iran now has a veto over policy, since it has proven that it and its proxies can hit oil facilities, refineries and essential pipelines.
Trump is too much in the back pockets of Big Oil to see it, but the way to avoid a long-term oil crisis over the Ukraine and Iran Wars is to switch to electric vehicles and to power them with wind, water and solar. His having arranged for a release of a small amount of European reserves may help him talk up the US markets going into the midterms. It isn’t likely to make a big impact on gasoline and diesel prices, and the provision of a new 800k barrels a day to the markets could easily be offset by the loss of supply from elsewhere as a result of acts of war.
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