Oil Surplus Meets Oil Shortage: What the Heck is Going On?

How can the world have too much oil—and not enough—at the same time?

The global oil market is sending mixed signals—and that’s usually when something important is breaking beneath the surface. On paper, the world is producing more crude than it needs, with an apparent surplus of roughly 2 million barrels per day, potentially rising toward 4 million barrels per day because of slower economic growth, efficiency gains, and electrification reducing demand growth. That sizeable imbalance accumulates in inventories or storage. Why, then, is there a serious shortage in the global oil market?

Under normal conditions, oversupply would push prices down and ease concerns about energy security. But these are not normal conditions. A geopolitical shock centred on Iran and the Strait of Hormuz has disrupted the flow of oil to such an extent that scarcity, not surplus, is now driving market behaviour.

The result is a paradox: high prices alongside physical shortages. Tankers are delayed or rerouted, refined fuel markets are spiking, and critical supply chains are tightening. Meanwhile, financial markets—the futures contracts that typically set benchmark prices like Brent and West Texas Intermediate—are telling a different story, one that assumes the crisis will ease over time.

That disconnect between the “paper” market and the physical flow of barrels is widening, and it’s creating confusion not just for traders, but for policymakers and the public.

This interview explores that gap.

Energy economist Ed Hirs from the University of Houston helps unpack what’s actually happening inside the oil system right now. His analysis draws a sharp distinction between two overlapping but increasingly divergent realities: the financial market, which prices oil based on expectations of future supply and demand, and the physical market, where buyers are scrambling to secure fuel today at significantly higher prices.

At the centre of the disruption is the Strait of Hormuz, a chokepoint through which roughly 20 per cent of global oil supply typically flows. The current conflict has effectively removed a large portion of that supply from global markets, even as production elsewhere continues. Strategic reserves are being tapped, alternative routes are being tested, and regional producers are trying to compensate, but the system is under strain.

What makes this moment especially volatile is the uncertainty surrounding political decision-making. Diplomatic efforts appear fragmented, and market participants are struggling to assess how long the disruption will last. If the conflict is resolved quickly, prices may stabilize. If it drags on, the consequences could escalate rapidly—not just for oil, but for the broader global economy.

This conversation is about understanding that risk.