It Could Take Months For Prices To Go Down After The Strait Opens - Here's Why

Donald Trump has given Americans the impression that once the Strait of Hormuz is opened the price of oil (and gasoline) will quickly return to pre-war prices. That is simply not true. Here, from CNN, is the truth:

Assuming the strait has truly reopened, a logistical nightmare is about to unfold.

Step one: Clearing the strait’s bottlenecks. That’s going to take a long time, since tankers move about as fast as you can ride a bicycle.

First, the 128 or so tankers stuck in the strait need to clear out, carrying around 160 million barrels of oil with them, according to Capital Economics. That will make way for empty tankers to enter the strait, load up and head back out.

A return to full tanker transit capacity could take up to three months, according to Victoria Grabenwöger, senior oil analyst at Kpler.

Step two: Drawing down stockpiles. Empty ships will first draw oil from the warehouses that have been filled up – because producers had nowhere else to put it.

The good news: Refiners were pragmatic about their storage and never fully filled their stockpiles. That should reduce some of the time it would otherwise take to reboot pumps. But fuller-than-typical inventories will nevertheless delay getting oil production back up to full capacity.

Step three: Restarting production. Middle Eastern oil wells were largely shut off during the war. Turning on production isn’t like flipping a switch. It’s a complex engineering challenge that involves serious physics and labor over up to several weeks.

Production will need to be restarted – slowly – to ensure reservoirs of crude don’t collapse, requiring re-drilling and substantial repairs. Water and gas injected into wells need to be rebalanced, which is a tricky business.

Because wells in the region are large and close to one another, restarting production will require significant coordination across companies and countries to ensure injected water and gas pressure remain consistent across multiple wells.

Step four: Making repairs. A number of refiners, natural gas producers and some oil producers were damaged during the war. Some repairs to the damaged critical infrastructure could take years to complete, oil companies said.

There’s a lot of oil go get back online: 12 million barrels per day of crude output and 3 million barrels of refined petroleum products have been shut across the Middle East – mostly in Saudi Arabia and Iraq, according to Kpler. That’s no easy feat.

All of that assumes the war is over and there are no further disruptions in the strait. And we all know what happens when you assume….