Oil: Releasing Reserves Means Increasing Market Pressures

On June 23, the head of the International Energy Agency (IEA) announced that IEA’s 28 member countries had agreed to release 60 million barrels of oil in the next month from their reserves “in response to the ongoing disruption of oil supplies from Libya.”

These extraordinary powers had been exercised only twice previously:  after Iraq’s invasion of Kuwait in 1990, and in the wake of Katrina in 2005.

What is odd, though, is that the prior two cases were invoked as oil prices spiked in the face of immediate unforecasted supply curtailments.  However, in this instance, the Libyan supplies have been off the market for months, and oil prices had been falling for several weeks in a row.  So, what gives?

I would like to think that there is a good reason for this action, but I can’t find it yet.  And, neither apparently can a lot of petroleum market analysts.  See, for instance, this blog.

Among others, a June 24 research report by Deutsche Bank (NYSE: DB) entitled “Emergency? What Emergency?” concludes that the move is politically-motivated primarily by the Obama Administration to drive down gasoline prices and improve voter sentiment as the peak summer driving season approaches.  Others have opined that the Obama Adminstration was targeting oil speculators as “bad guys”, and wanted to hurt them the most — in their wallets — by causing their trading positions to suddenly and dramatically turn negative.

Now, I don’t understand the way the IEA works.  I wouldn’t think that the U.S. would be particularly influential in a multi-lateral NGO based in Paris.  

And, if they powers-that-be are going to the well this summer to support political needs of the Obama Administration, won’t they have to do the same next summer too — right in the middle of the 2012 Presidential campaign?  Are they that stupid to think they’ll only have to shoot this bullet just once?

While it doesn’t seem that the “emergency” release of oil stocks is warranted by market conditions on their own merit, what we don’t know is what really happened at the last meeting of the Organization of Petroleum Exporting Countries (OPEC) on June 8, just two weeks in advance of the IEA’s surprise move.  By all accounts, the meeting was a debacle, with Saudi Arabia (long OPEC’s main player) seemingly losing control of the cartel.  Given that there was apparently a lot of communication between the IEA and Saudi Arabia and that Saudi Arabia was supportive of IEA’s move, the political aim of the oil release may be more to buttress the Saudi government than the U.S. government. 

Because, if the Saudi government falls, as others in this Arab Spring have, it is generally assumed that power will be assumed by Wahabbi forces that won’t have much reservations about shutting off the oil spigots — and the world economy will be in a world of hurt when Saudi oil supplies are withdrawn.

To the extent there’s any consensus among energy pundits, it’s that the release of strategic oil reserves is yet another indicator of a future of increasing oil prices.  With increased government meddling in the oil markets, producers will be reluctant to make major investments in marginal fields or breakthrough technologies to enable opening new production horizons.  This can only put upward pressures on oil prices and oil market volatility.

All in all, it seems to me that this release has little good long-term effect or benefit on the energy industry, with some considerable harm to it.  And, it may well be a harbinger of tougher times ahead. 

As Gregor Macdonald puts so well in his posting “The Dark Side of the OECD Oil Inventory Release”, the “release of inventory is confirmation that the era of permanently constrained supply is now very much with us. Because industrial economies are simply machines that convert energy inputs into useful work and services, [the] action is also a reminder that the dream of higher growth in conjunction with lower oil prices is now a backward looking view, a nostaglia for a past that’s no longer possible.”

1 reply
  1. 21tiger
    21tiger says:

    Releasing reserves means increasing supply, thus the price has dropped significantly in the last two weeks, hence the surge in the S/P 500… ah, is that right?

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