The World Rejoices As IEA Agrees to Release Crude from Strategic Reserves

The 28 countries comprising the International Energy Agency (IEA) have agreed to release a total of 60 million barrels of oil as a result of the continuing supply disruption to Libyan oil. This is only the third time the IEA has authorized such a release. The first time was the first Gulf War in 1990-1991 when about 17 million barrels were released from the US Strategic Oil Reserve and the second release of about 21 million barrels occurred in 2005 following Hurricane Katrina. The US Strategic Reserve holds about 730 million barrels.

The IEA noted that seasonal demand from refiners is expected to increase, making the supply shortage worse. More important, perhaps, is that a tight oil supply and the concomitant high prices are a real anchor on the recovering global economy.

According to the IEA the turmoil in Libya had eliminated a total of 132 million barrels of crude from the market by the end of May and the agency expects Libyan supply to remain at zero for the rest of this year. IEA members, including the US, will release a total of 2 million barrels a day beginning in July. The US Department of Energy will release 30 million barrels from the Strategic Reserve, half the IEA’s total.

Perhaps more important than the actual amount released is the fact that the IEA has determined that it can and should act in this situation. Libyan supply had been running at about 1.5 million barrels/day before the internal strife began. Rather than just let the market adjust by itself, the IEA has demonstrated that it is willing to do something virtually unprecedented.

A noteworthy aspect of the IEA’s action is that it puts some elasticity of supply back into the oil market. High oil prices are largely the result of demand increases that cannot be quickly met with supply increases. Opening the taps to a storage tank is a lot faster than getting Saudi spare capacity on line or drilling for more oil.

There will inevitably be criticism of the IEA’s action and demands that it cease its interference in the market at once. The IEA’s announcement has caused the price of WTI crude to fall by more than -5%, to below $91/barrel. It could fall a lot further.

Paul Ausick