Oil Markets May Recover, but Production Restart Remains Biggest Challenge: Jim Burkhard, S&P Global Energy

The first step is restoring confidence among shipping companies that they can safely move vessels in and out of the Gulf region. It appears we're moving in that direction, although we're not completely there yet.

The next crucial step will be when oil-producing countries decide to reopen or increase production. We've seen an unprecedented scale of production curtailments during this crisis. The key question now is whether oil production can return smoothly or whether restarting operations will take longer than expected.

There has been a strong focus on shipping, and rightly so, because oil must pass through the Strait of Hormuz. But once shipping normalizes, the biggest uncertainty will shift upstream. Can oil fields quickly return to their previous production levels, or will technical and operational challenges delay the recovery? That's likely to become the next major concern for the market.

One of the biggest lessons is the value of strategic petroleum reserves during a crisis like this. China's inventories, along with the strategic reserves maintained by Japan, South Korea and the United States, played an important role in helping both regional and global markets adjust to the disruption. Large emergency stockpiles provide a critical buffer against supply shocks.

Another important lesson is the need for alternative export routes. We are likely to see renewed efforts in the Middle East to expand pipeline infrastructure that bypasses the Strait of Hormuz. Saudi Arabia and the UAE already have some alternative pipeline capacity, and countries such as Kuwait and Iraq are also likely to explore additional options to diversify their export routes.

They actually performed better than expected. Strategic petroleum reserves proved to be surprisingly effective in helping markets adjust to the disruption.

However, inventories were only part of the story. China, Japan and South Korea also reduced their oil purchases instead of trying to maintain previous import levels. For example, when China's imports declined, it eased pressure on global oil prices. Japan and South Korea followed a similar approach. Even the United States, despite being a net oil exporter, reduced its imports during the crisis.

In other words, strategic reserves gave these countries the flexibility to lower imports without disrupting domestic supply, helping stabilize the global oil market during a period of significant uncertainty. 

Consumption did decline somewhat, but nowhere near as much as crude oil imports. Countries were able to maintain most of their domestic consumption while reducing imports, which helped ease upward pressure on global oil prices.

That brings us back to the role of strategic petroleum reserves. If a country has built up substantial inventories before a crisis, it can draw on those reserves when supplies are disrupted. Instead of buying the same volume of oil from the market, it can temporarily rely on its stockpiles.

Of course, that strategy assumes the crisis will eventually be resolved because inventories are not unlimited. But having significant reserves gives governments valuable time to adjust while waiting for normal supplies to resume.

This was largely an Asia-centred crisis, so it posed challenges for many countries, including Indonesia, Thailand and India.

India has managed to navigate the situation despite facing higher costs and supply pressures. Like many other countries, it will learn from this experience and strengthen its preparedness in case a similar disruption occurs in the future.

Expanding energy supply takes time. Whether it's a large solar park, a nuclear power plant, an oil and gas field or biofuel production, none of these can be developed overnight.

That's why governments need a long-term vision. Each country must decide how much diversity it wants in its energy mix and weigh that against the associated costs. For example, biofuels offer several benefits, but they can also be more expensive. Every country must determine where it wants to strike that balance.

I think the discussion is really about energy expansion rather than energy substitution. Last year, the world consumed more oil and natural gas than ever before. At the same time, renewable energy generation also reached record levels. So this isn't about choosing one source over another, it's about adding more energy across all technologies.

Countries like India need significantly more energy to support economic growth. That means expanding renewable energy while also ensuring adequate supplies of conventional fuels. The challenge is not replacing one energy source overnight, but building a more diverse, resilient and reliable energy system.