The IEA released a Safety-Net: Hope Hangs on the Improvement of the Oil Market

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The act of releasing 60 million barrels of oil from the U.S. and 27 other IEA countries strategic reserves in July was surprising but could help push down the oil prices.

Reserves Released

The other 50% comes from Europe (30%) and Asian countries (20%). The International Energy Agency (IEA) released oil worth $7 billion at current prices and by doing so, had saved consumer countries $110 billion of monthly costs. Out of the total amount released, the U.S. has contributed to half the amount.

The first time such action was taken by the agency was in 1990 during the Iraq War, and then in 2005 due to Hurricane Katrinas disaster. Oil consumer governments began keeping reserves of crude oil and oil products since the oil crisis of the 1970s when the members of Organization of Arab Petroleum Exporting Countries (OAPEC) put up an oil embargo as a response to U.S. decision to supply the Israel military.

Aiding the Oil Market

Based on the oil prices spikes in these two periods, the price of oil could rise to $200 per barrel if similar crisis strike again.

Badr Jafar, president of Crescent Petroleum believes that such oil releases will only work in cases where the market can vouch that the interruption will only be temporary and that supplies will return to normal so that stockpiles can be rebuilt later. Only action by oil suppliers can provide a long term solution to the current oil market squeeze, he said.

If the oil prices increased to $ 200 per barrel Mr. Jafar continued it would , translate into an extra $110 billion monthly oil costs for IEA member states at a time when their economies still remain fragile. Such a price spike would likely precipitate another global recession and even greater economic losses as a result. So releasing $7 billion worth of oil from strategic reserves each month while supplies remain constrained would appear very worthwhile.”

This time the tightness in the oil market came due to a loss in the Libyan crude oil. Analysts were puzzled by the IEAs decision. “We’re already several months into the Libyan disruption and a lot of the logistical rearrangement of supplies has already taken place,” as stated by Guy Caruso, senior adviser at the Center for Strategic and International Studies and a former administrator of the Energy Information Administration.

Skepticism

President Barack Obama has gained criticism from the oil industry, business groups and Republicans in Congress, for making a political choice to raid emergency oil supplies instead of embracing their proposals to spur increased domestic oil production.

An official, later, said, “The U.S. maintains the Strategic Petroleum Reserve precisely for this purpose: to respond to domestic or international energy supply shortages, disruptions of significant scope or duration” that can affect the economy. Some analysts believe that Thursday’s move was clearly political, with elections around the corner in the U.S. and France and politicians on the defensive over high pump prices for gasoline.

Jafar further said ,”The oil market is currently in dysfunction and a refusal to recognize that could jeopardize the future of the industry. We believe that private sector firms, like Crescent Petroleum, can go a long way to helping restore the oil markets stability, but we need both public and private sectors to pull together to achieve this. With prompt action I believe that the credibility of the oil market can be restored and a healthy relationship between producers and consumers restored.”

“I expect this action will contribute to well-supplied markets and to ensuring a soft landing for the world economy,” said Nobuo Tanaka, the executive director of the IEA.

Sources: Arab News, Wall Street Journal, Saudi Gazette

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