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Page added on July 2, 2011

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A Strategic Blunder

Business

Releasing millions of barrels of precious oil reserves to bring down gas prices doesn’t meet the IEA’s own standards.


Opening the tap on oil the world has saved for a rainy day isn’t a panacea.

Over the longer term, the move by the International Energy Agency is likely to exacerbate, not lessen, the upward pressure on the price of crude oil and, by extension, the petroleum products that make modern civilization run.

The IEA said on June 23 that its 28 member nations, which include some of the world’s biggest oil-consuming nations, agreed to release 60 million barrels of oil from strategic stockpiles to offset the loss of oil supplies from Libya.

Half of the allocation is from the U.S. Strategic Petroleum Reserve, which on Friday said all the barrels found “apparently successful offers.”

This is only the third time that the IEA has coordinated the release of government-controlled oil inventories—including 1991, as U.S.-led forces invaded Iraq, and 2005 in the wake of Hurricane Katrina. Controversy has always accompanied such decisions, and this time is no different.

While the IEA didn’t specifically mention oil prices in its market-moving communiqué, senior White House officials have said that President Obama has been concerned about the rising price of gasoline in the U.S.

Such mixed messages undermine the purpose of strategic oil inventories. Governments keep them in order to quickly make up for any significant and short-term drop in oil supplies. The key words here are “quickly” and “short-term.” This decision fails on both counts.

It became apparent in March that Libya’s oil production had been knocked off line amid the uprising against Col. Moammar Gadhafi. From mid-February to the end of April, oil futures surged by 35% as unrest increased in the Middle East. If there was a time to announce a stockpile release, that was it.

Even so, the world’s strategic inventories are no match for a sustained outage from Libya. According to the IEA, total oil stockpiles—commercial and public—amount to more than four billion barrels. Of this, 1.6 billion are public and earmarked for emergency use. Analysts estimate that if Libyan production stays off line for the rest of 2011, the total loss would come to about 600 million barrels of high-quality crude oil, or more than a third of emergency stockpiles. That doesn’t take into account the fact that Libya’s grade of crude makes up a small percentage of those stockpiles.

Which leaves the IEA in a bind. It’s unclear what the organization aimed to accomplish. Oil prices were already on their way down when the announcement was made, and on Thursday oil futures on the New York Mercantile Exchange traded above preannouncement levels. They ended Friday at $94.94 a barrel, 4.1% higher on the week.

A decline in stockpiles, be they commercial or strategic, is still a decline. So the cushion relied on to smooth out price swings is getting smaller. Long gone are the times when markets could be assuaged by such interventions. Traders and investors today are savvier and more willing to second guess such prowess.

That places a bigger responsibility on the IEA to preserve and use responsibly the biggest weapon in its arsenal.

Barron’s



3 Comments on "A Strategic Blunder"

  1. Bob Owens on Sat, 2nd Jul 2011 3:10 pm 

    The SPR is for an EMERGENCY! Like “Hurricane destroys New York City” or “We must get the harvest in or we will starve!”. Everyone has plenty of fuel; just look around. We are just paying a little more. Wake up America! Stop being stupid.

  2. Makati1 on Sun, 3rd Jul 2011 3:02 am 

    The industrial farm corporations have eliminated the emergency grain storage by the government and we are now at their mercy for food.

    Perhaps it is big oil who now want a strangle hold on Americans?

    After all, the financial conglomerate holds our collars and chains already.

    How does it feel to be a slave on the 4th of July?

  3. CXGZ61 on Sun, 3rd Jul 2011 3:19 pm 

    The strategy has nothing to do with practicality. It has everything to do with The US Gov. trying to convince ignorant people they are on top of the problem.

    Why the US would put so many restrictions if not outright bans on drilling which increases supply over the long term and instead release a one time supply of oil to increase supply over the extreme near term is beyond me.

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