US and others plan biggest release of reserve oil
Thursday, June 23, 2011
NEW YORK (AP) — The United States and other nations that depend on oil imports said Thursday they will release and sell 60 million barrels of crude from emergency stocks in an effort to ease the strain high oil prices are putting on the global economy.
The release by the International Energy Agency, a group of more than two dozen countries, covers only what the world uses roughly every 16 hours. But it was enough to send oil prices lower, at least for the moment.
In addition to helping the struggling economies of the U.S. and Europe, analysts said the move was meant as a rebuke to OPEC, which has refused to increase oil production to bring down prices.
It will be the largest sale of crude ever from world strategic reserves and only the third since the IEA was formed in 1974 after the Arab oil embargo. The IEA released oil in 2005 after Hurricane Katrina and in 1990 and 1991 after Iraq invaded Kuwait.
Half the oil will come from reserves in the U.S. Refiners who turn crude into gasoline will be able to bid on the extra oil and have it shipped to them from the salt caverns along the Gulf Coast where it is stored.
The IEA said high oil demand and shortfalls of oil production caused by unrest in the Middle East and North Africa threatened to “undermine the fragile global economic recovery.”
The uprising in Libya has taken 1.5 million barrels of oil per day off of the market — half a million barrels less than will be released each day by the IEA. The price of oil rose to nearly $114 per barrel in at the end of April, a level not seen since the summer of 2008.
Since then, however, oil prices had fallen considerably, and analysts questioned how much relief the move would provide the economy, and for how long.
One analyst, Andrew Lipow, said the timing of the announcement, a day after Federal Reserve Chairman Ben Bernanke delivered a negative outlook on the economy, suggests that industrialized countries are grasping for solutions. He said Americans should expect the price of gasoline to fall, but not dramatically, in the coming weeks.
“Fifteen or 20 cents a gallon of relief is not enough to make people feel good about their job prospects or losses on the stock market or our general economic slowdown,” he said.
IEA and the White House said they were acting to increase the supply of oil available during the peak summer driving season.
“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” Energy Secretary Steven Chu said.
Gas prices at the pump have already fallen for 20 days in a row. They were down another penny Wednesday, to a nationwide average of $3.61 per gallon, according to the AAA Daily Fuel Gauge Report. That’s about 21 cents lower than a month ago.
The timing of the release brought criticism from business groups and Republican lawmakers, who accused President Barack Obama of playing politics with the country’s oil reserves, which are intended to address emergencies.
The amount of oil to be released, 2 million barrels per day, represents 2.2 percent of daily global oil demand. The 60 million barrels to be released over the span of a month is less than one day’s demand, about 89 million barrels.
The IEA’s move comes two weeks after OPEC, the Organization of Petroleum Exporting Countries, decided during a tense meeting not to increase oil production to meet rising demand. OPEC is made up primarily of Middle Eastern and North African nations.
OPEC countries are divided over whether to increase supply. Iran and Venezuela want to keep production stable in hopes of keeping prices — and revenue — high. Saudi Arabia wants to increase production, fearing that high oil prices will hurt the global economy and reduce oil demand over the long term.
The head of the IEA, Nobuo Tanaka, expressed disappointment about OPEC’s decision after that meeting. At a press conference Thursday in Paris, he said IEA’s release would “contribute to ensuring that adequate supplies are available to the global market.”
Kevin Book, an analyst at Clearview Energy Partners, said the move was the first time the IEA has used its reserves as a defensive weapon “to send an unforgettable message to OPEC.”
The reserves, he said, have always acted as a shield. “Now we are using it to bludgeon prices globally. This is the first time we’ve used our shield as a club.”
In addition, Book said, it sends a signal to oil investors that governments will go to great lengths to fight high oil prices. These oil investors, including banks, mutual funds and pension funds, buy contracts for oil in hopes the price will go up, but they don’t actually use the oil. Critics have said these investors, derided as speculators, have helped push oil prices far higher than they would otherwise be.
“Part of the reason to do this is to make anyone on the other side of oil consumers, whether it is speculators or oil cartels, worried that it will happen again,” Book said.
Oil finished trading at $95.41 on Wednesday just before Fed Chairman Ben Bernanke said the economy may be in bigger trouble than previously thought. Prices dropped to about $94 overnight, then fell as low as $89 per barrel after the IEA announcement. Oil finished trading Thursday at $91.02.
Worldwide oil demand is at record levels because the recovering economies of the West and the surging economies of Asia are burning more gasoline, diesel and jet fuel.
The unrest in the Middle East this spring cut into supply. Those two factors drove prices higher, raising costs for shippers, travelers and commuters and leaving people less money to spend on clothes, entertainment and travel.
The U.S. economy grew at a rate of 1.8 percent in the first quarter of this year, down from 3.1 percent in the previous quarter, in part as a result of high gasoline prices.
But oil prices had already fallen sharply from those recent highs as reports surfaced that Saudi Arabia was going to increase production despite OPEC’s decision, economic growth in the U.S. was faltering, and Greece’s financial crisis threatened to spread to the rest of Europe.
Also, oil supplies in the U.S. are among their highest levels ever, a result in part of rising North American production.
Analysts also said that while the IEA move will lower oil prices in the short term, it also reveals major concerns about the ability of oil producers to meet growing world demand in the future. If they can’t, oil prices will rise dramatically.
Bernard Baumohl, chief global economist at the Economic Outlook Group, said oil would have to drop below $80 a barrel to have much economic impact on the economy. He said he doesn’t think the 60 million barrels is enough to do that.
“The argument is, if we can lower oil prices that would be a major tax cut,” Baumohl said. “The logic is fine. Whether it can successfully be carried out is the question. And I don’t think it can.”
The IEA was established a year after the 1973 oil crisis brought on by an oil embargo imposed by OPEC member countries. Oil-producing countries in the Middle East refused to sell oil the U.S. and other nations for about six months in 1973 and 1974 in protest of those countries’ support for Israel in the Yom Kippur War.
IEA members are required to hold in reserve the equivalent of what they would import in 90 days, though countries collectively now hold 146 days’ supply.
The U.S. stocks, called the Strategic Petroleum Reserve, hold 727 million barrels. The reserve has never been fuller. It held 707 gallons before the U.S. last tapped the reserve in 2008 in response to supply disruptions caused by hurricanes Gustav and Ike.
The IEA decision will free about 30 million barrels in the United States. Europe will release 18 million barrels and industrialized countries in Asia 12 million.
For U.S. refiners, bidding for the oil now held in reserve will mean having to import less from abroad. The 1 million barrels per day to be released is about 20 percent of what Gulf Coast refiners import.
The IEA left open the possibility that it could continue the program after a month. Analysts say it is all but certain that Libyan crude won’t be flowing again by then. “The question is: ‘What happens in a month or two or three?’,” asks Michael Levi, a senior fellow for Energy and the Environment at the Council on Foreign Relations.
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