From London: The international energy watchdog is delivering a blunt message to the world. Supply measures alone won't be enough to mitigate what the International Energy Agency describes as the largest supply disruption in the history of the global oil market, triggered by the conflict in Iran and the effective closure of the Strait of Hormuz. Governments must act on the demand side, and quickly.
By shutting down the Strait of Hormuz that links the Persian Gulf to global markets, the war has effectively erased the 20 million barrels of petroleum that used to traverse the waterway each day. The disruption is severe. Closures of production capacity in the Middle East will subtract around 10 million barrels a day from global oil production, compounding the shipping blockade. Around 400 million barrels of oil will flow into markets from strategic reserves, roughly one third of readily available reserves and the largest release in history. Yet this is not a solution, only a bridge.
While policymakers continue to manage supply disruption due to the conflict in the Middle East, efforts to reduce consumption could provide faster relief, according to the International Energy Agency. The agency has published 10 immediate actions it recommends governments and businesses adopt. Measures focus primarily on road transport, which accounts for around 45% of global oil demand. Working from home where possible reduces fuel demand for commuting, while lowering speed limits, shifting from private cars to public transport, and alternating private vehicle access in cities could further reduce congestion and fuel consumption.
The recommendations extend beyond commuting. The IEA said business flights alone could be reduced by around 40%, and if widely adopted through corporate travel reduction efforts, this could lower jet fuel demand by between 7% and 15%. The agency also encourages switching from gas cooking to electric alternatives and rerouting liquefied petroleum gas away from transport.
Asia has been quickest to act. Japan and South Korea respectively source 90% and 70% of their oil from the Middle East, making them vulnerable to prolonged disruption. Thailand ordered civil servants to take the stairs rather than the elevator, and to work-from-home for the duration of the crisis. It increased the air-conditioning temperature to 27 degrees Celsius, and will tell government employees to wear short-sleeved shirts over suits. The Philippines and Pakistan have introduced four-day work weeks for government employees, while Sri Lanka has shut public offices on Wednesdays. Vietnam's Ministry of Industry and Trade urged employers to allow remote work where possible to reduce transportation needs and fuel consumption.
The challenge for policymakers is that these measures are voluntary. The IEA says it is not setting out a list of sacrifices but a coordinated response to a system under strain. The agency argues that these well-targeted measures can reduce costs for consumers, limit inflationary pressure and avoid the need for the kind of broad, expensive subsidies seen during the last crisis. Yet compliance depends on government leadership and corporate willingness, both of which vary considerably across regions.
For Australia, the implications are significant. The IEA warned that rising energy costs risk hitting the poorest households hardest, calling on governments to provide targeted financial support to cushion the blow. Oil prices have more than doubled since the conflict began in late February. IEA drawdowns can at best only offset a fraction of the roughly 15 million barrels per day net supply loss of crude and refined products due to ongoing halt to most tanker transits of the Strait of Hormuz, meaning sustained high prices should be expected if the conflict persists. The IEA has advised that normalisation of supply could take weeks or months.
The policy debate cuts to a fundamental question about how markets respond to shock. The traditional instinct is to increase supply. But when supply is constrained by geopolitics and geography, demand destruction becomes the faster, if less comfortable, tool. Whether governments worldwide will embrace sustained work-from-home arrangements and fuel conservation broadly enough to move prices remains uncertain. What is clear is that the energy watchdog no longer believes that releasing strategic reserves and hoping for ceasefire is sufficient. For now, staying home is part of the answer.