Iran War Triggers Global Rush to Build 500 Million Barrels of Oil Reserves
Countries affected by the economic fallout of the Iran War are increasingly focused on establishing domestic oil and gas storage capabilities to mitigate future disruptions. This strategic shift could lead to an additional demand of approximately 500 million barrels of oil and gas.
The closure of the Strait of Hormuz, which lasted over three months, significantly impacted global oil and liquefied natural gas supplies, accounting for about 20% of the market. During this period, Brent crude prices surged to nearly $120 per barrel. However, the situation could have escalated further without the intervention of emergency reserves.
Emergency Reserves as a Stabilizing Force
In response to the crisis, all 32 members of the International Energy Agency (IEA) agreed to a historic release of 400 million barrels from strategic petroleum reserves (SPRs), with the United States contributing the largest share. This drawdown marked the sixth since the IEA’s establishment and reaffirmed a strategy developed post-1973 Arab Oil Embargo, which mandates that member countries maintain emergency stocks equivalent to at least 90 days of net imports.
China’s approach offers additional insights. Although not a full IEA member, China has built what is believed to be the world’s largest SPR, holding over a billion barrels. During the conflict, China reduced crude purchases by more than a third, signaling its capacity to utilize its reserves effectively. This strategy allowed China to save billions and shield itself from the economic turmoil affecting other Asian nations reliant on Middle Eastern energy imports.
Economic Strain on Vulnerable Nations
Countries like India, Pakistan, and Thailand experienced severe economic strain due to their limited domestic reserves. In the absence of substantial emergency stockpiles, these nations resorted to subsidies, fuel restrictions, and other austerity measures to manage consumption. As a result, many vulnerable importers are now likely to expand their SPRs where financially feasible, while others may focus on demand-reduction strategies.
The Rush for Strategic Reserves
India, the world’s most populous nation and the third-largest oil importer, is in urgent need of larger strategic reserves. The IEA projects that India will become the primary source of global oil demand growth by 2030. Currently, India’s reserves cover only eight days of imports, falling short of the IEA’s 90-day standard. Meeting this benchmark would require an additional 400 million barrels, costing approximately $28 billion at $70 per barrel.
New Delhi is reportedly moving towards this goal by directing the Oil and Natural Gas Corporation (ONGC) to establish a 1.75 million-tonne reserve, which would increase India’s emergency storage capacity by about one-third.
Pakistan faces similar challenges, relying on the Middle East for approximately 90% of its oil and LNG imports. The country is now exploring options to expand its domestic storage, which would require around 35 million additional barrels to meet the 90-day import standard.
Australia, the only full IEA member that has consistently failed to meet the agency’s SPR requirements, has announced plans to invest $7 billion to maintain at least 50 days of fuel reserves. Other nations, including Singapore, Asia’s leading oil-refining hub, are also considering expanding their strategic oil and gas storage capabilities.
European and Gulf Responses
Europe has an extensive gas storage system designed to manage seasonal demand, especially during winter months. However, with imported LNG now constituting over 40% of its gas supply—more than 60% of which comes from the U.S.—the region may opt to develop additional government-controlled storage facilities.
Even energy-producing nations are adapting to these dynamics. Gulf national oil companies are seeking to establish more storage options outside their regions to enhance export flexibility during crises. Saudi Aramco, which operates storage facilities in Japan, South Korea, Egypt, and northwest Europe, has indicated plans for further expansion.
Implications for Oil Prices
The combined efforts to establish new storage facilities could necessitate around 500 million barrels of crude and refined products. Additionally, approximately 400 million barrels have already been withdrawn from global stocks since the onset of the conflict, with further draws expected to continue through the summer, even after the Strait of Hormuz reopens.
This situation could lead to a total demand increase of roughly 1 billion barrels. Even if this demand is spread over several years, it is likely to exert significant upward pressure on prices.
The IEA anticipates a surge in global oil supply next year as Middle Eastern production recovers, potentially exceeding demand by over 4 million barrels per day. Thus, even a substantial demand increase driven by storage initiatives may not lead to skyrocketing crude prices.
However, if Gulf supply recovers more slowly than anticipated due to logistical challenges or geopolitical instability, the situation could change dramatically.
The long-term implications of this “urge to hoard” strategic reserves are complex. A world with significantly larger reserves may become more resilient to shocks, potentially stabilizing prices over time. Countries like India may adopt a more cautious purchasing strategy during periods of tight supply, similar to China’s approach, which could help mitigate price spikes.
As the immediate crisis subsides, the key takeaway for oil-importing nations is clear: unforeseen disruptions can occur, last longer than expected, and impact economies most severely where there is no buffer.
Source: www.zawya.com
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