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Page added on June 26, 2011

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As The IEA-OPEC Nash Equilibrium Collapses, Is A 1973-Style OPEC Embargo Next?

Public Policy

Last week’s dramatic decision by the US administration to strongarm the IEA into releasing strategic petroleum reserves (of which the US would account for 30 million barrels, or half of the total), is nothing but yet another example of the hobbled and incredibly short-sighted thinking that permeates every corner of the Obama administration. Because as the WSJ reports, “the move by the U.S. and its allies to release strategic reserves of oil could provide a much-needed shot in the arm for the U.S. economy, but risks inflicting lasting damage on the already tense relationship between oil producers and consumers.” The move comes on the heels of the dramatic collapse in OPEC talks in Vienna two weeks ago when Saudi Arabia was effectively kicked out of the cartel, further confirmed by reports that the IEA consulted with Saudi (and China and India) in advance of its decision (more later). Additionally, “OPEC and the European Union are due to hold an energy summit in Vienna Monday that will be the first official meeting of producers and consumers since the IEA’s move, and will provide a platform for OPEC members to express their disquiet over the stocks’ release. However, OPEC’s biggest player, Saudi Arabia, won’t be present.” Make that former player, in an organization now headed by the previously #2 producer, Iran (which just happens is not all that pro-US). The biggest threat, however, is that in direct retaliation against the IEA’s cartel-like decision, which comes at the expense of the remaining OPEC countries, is that as Zero Hedge suspected, the next step will be a more than proportionate cut in crude production by OPEC: “Some analysts speculated that OPEC could respond to the IEA release by cutting output to offset the increased supply.” What happens next is complete Nash equilibrium collapse, with a high possibility of a 1973-type OPEC oil embargo announcement in the immediate future.

“Going ahead with an increase would cut into revenue, said Christof Ruehl, chief economist of BP PLC. But cutting production to offset the release, he said, “would be seen as hostile by IEA members” and “could lead to a war of attrition, at least as expensive,” in which OPEC cuts production and the IEA keeps releasing stocks to make up for the shortage.” The winner of all this, is of course, China, which will gladly benefit from ongoing blue light specials courtesy of the US Strtategic Petroleum Reserve to build up its own reserve holdings, as the rest of the world squabbles over a US-dominated status quo whose time has now officially passed. And just as the rare earth metal price spike in recent weeks demonstrates what happens when China is the marginal anything in any supply chain, one can be certain that the price of Crude will be far, far higher several years from now.

And speaking of Iran, its oil ministry SHANA wasted no time in firing the retaliating round against the IEA’s decision, accusing the US of acting unilaterally and purely for the benefit of Obama’s reelection campaign, warning that the drop in oil prices won’t persist:

Iranian governor for OPEC Mohammad Ali Khtatibi says International Energy Agency (IEA) decision to draw oil from its emergency reserves implies intervention in the ordinary function of the oil market.

Speaking to Shana, Mr. Khatibi said that the trend of falling oil prices would not be sustainable.

‘Following the failure to bring down the prices at 159th ministerial meeting of OPEC in June 8, the United States of America and Europe are using all the means to push oil prices lower, Iranian governor for OPEC said.

Khatibi noted that IEA’s initiative to release oil from strategic petroleum reserves would followed by artificial falling of oil prices but those countries believing in open markets showed they are not genuine in their believes.

According to Khatibi recent days’ developments in oil market is not the result of issues relating to supply and demand or market needs but political pressures by the United States drives the initiative.

The United States government plans to influence the results of the upcoming presidential elections of the country by putting pressure on oil prices’ top Iranian oil official said.

Khatibi pointed out that developed countries initiative to draw oil from strategic petroleum reserves is risky because they cannot continue the move in the long term.

He added: these reserves are being held for emergency situations so the consuming countries of the International Energy Agency will have no other choice except to replenish the reserves for further use.

Indeed, if Obama’s reelection campaign is such an emergency that it requires tapping the SPR, what will happen when there is a real emergency: such as a repeat of the 1973 OPEC embargo, which set the stage for Volcker’s last minute and very painful intervention to prevent the US economy from tailspinning into an inflationary supernova?

And just to make sure things get even more polarized, Dow Jones reports that the “International Energy Agency consulted Saudi Arabia, China and India before it authorized the release of some of its emergency reserves, the agency’s executive director said Sunday.”

“They understand, and they appreciate the action,” Nobuo Tanaka said on the sidelines of the second Global Think Tank Summit in Beijing.

The release of some of IEA’s strategic stockpiles is meant only to fill the gap in supply until higher crude volumes from Saudi Arabia reach the global market, he added.

Oddly enough, the leadership at the IEA is just as clueless as that of the US:

Separately, Tanaka said he asked China once again to join the IEA on Saturday. Although there hasn’t been any official response, Tanaka said he was encouraged by China’s recent statement publicly welcoming the IEA’s strategic stockpiles release.

Of course they welcome it you idiot, because they will be buying everything your member countries have to sell, and thanks to your stupidity, at a welcome discount. And why the hell would China want to join the IEA when it gets all the benefits of participation, without any of the obligations of being a member (i.e., adhering to your retarded politically-motivated agenda).

Good luck buying it back at the same price when OPEC fires its own warning shot and announces it is reducing crude output for all remaining OPEC countries (ex. Saudi) by 10-15%. And yes, Goldman will promptly move it Brent sell recommendation to a buy, within hours of said announcement.

ZeroHedge



9 Comments on "As The IEA-OPEC Nash Equilibrium Collapses, Is A 1973-Style OPEC Embargo Next?"

  1. DC on Sun, 26th Jun 2011 10:04 pm 

    They want to release about one DAYS worth of supply, or something like that, and all these guys are freaking out? The amount of oil they are realeasing is trivial compared to consumption, a blip really. Or is there something more going on here?

  2. CXGZ61 on Sun, 26th Jun 2011 11:43 pm 

    yes Obama is releasing oil because of a short supply but refusing drilling permits in the gulf and elsewhere preventing supply from increasing permanently. There is something more going on, the american public is being duped and scalped by an administration that is doing all it can to increase energy costs.

  3. ken on Mon, 27th Jun 2011 12:08 am 

    They are releasing the extra oil because the KSA failed to come up with Libya’s share… hmm. Anyone think the KSA is not past peak yet?

  4. CXGZ61 on Mon, 27th Jun 2011 12:28 am 

    This site is heavily censored toward 1 point of view.

  5. mo on Mon, 27th Jun 2011 1:10 am 

    Black QE. That’s all the petroleum release was.

    @planbeconomics

  6. Harquebus on Mon, 27th Jun 2011 1:28 am 

    Junkies never make sane or rational decisions.

  7. Poopypants on Mon, 27th Jun 2011 1:45 am 

    CXGZ61 says ‘This site is heavily censored toward 1 point of view’

    You are correct, and that point of view is reality.

  8. pike on Mon, 27th Jun 2011 7:36 am 

    OPEC is a joke nobody ever obeys production quoters.
    Remind me again were the magical political will for a united OPEC oil embargo will come from.
    I live on a planet called earth seriously.

  9. notbob on Mon, 27th Jun 2011 6:49 pm 

    “They are releasing the extra oil because the KSA failed to come up with Libya’s share… hmm. Anyone think the KSA is not past peak yet?”

    The oil markets are saturated with respect to supply. The demand is simply not there to warrant KSA making up Libya’s production shortfall.

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