Javier Blas is interesting this morning on why the International Energy Agency took its surprise decision yesterday to release emergency oil stocks – only the second done it’s done so in its history (the first two being the 1991 Gulf War and Hurricane Katrina). He reckons that:
Conspiracy theorists are having a field day, but I think that the release is ground of simpler facts: the loss of Libya production for longer than anticipated, the surprising robustness of oil demand growth in China, India and Saudi Arabia, and, yes, the evident impact of high oil prices on economic growth in developed countries.
Add to that a new view in Washington and at the IEA’s headquarters in Paris of the strategic reserve as a smart bomb, to be used in the event of small oil output disruptions, rather than a nuclear option, to be used only as last resort, and the release makes sense.
Does it make sense, though? The IEA’s emergency stocks mechanism was built to respond to short-term, sudden-onset shocks. But if (as Javier argues), Libya’s oil production is “not going to recover any time soon”, and emerging economy demand for oil is proving notably robust, then that’s not a shock at all. It’s structural.
And if it’s structural, then how does releasing stocks solve anything? As the Economist’s US politics blog notes this morning, the entire US Strategic Petroleum Reserve (from which half the IEA release is being sourced) is only 727m barrels: 38 days’ supply for the US, or 9 days for the whole world. You could use the whole lot, but you’re still not affecting the basic supply and demand balance.
To be sure, the emergency release will make life a bit easier in the short-term for politicians in oil-importing countries. But if that’s all there is to it, then how is this any different from all the other perverse subsidies for oil consumption even as oil is becoming more scarce – and how does it square with the G20 commitment to eliminate such subsidies?
