Oil: A new supply of oil may be filling a different kind of demand. The world’s biggest gas guzzlers are releasing 60 million barrels of shared reserves, even more than troubled Libya had been providing. But with other pro-growth policies exhausted, bidding to push oil prices down may be one of the few levers left for worried authorities to pull.
It’s only the third time in the nearly 40-year history of the International Energy Agency that its 28 members have dug into their stash. The last times were in the aftermath of Hurricane Katrina and the 1991 Gulf War. While the civil war in Libya provides the latest justification, there looks to be more to this decision.
In particular, the IEA is releasing more oil than Libya withdrew from the market, even as global demand seemed to be easing. While the absence of Libya’s light sweet crude has caused problems for some European refineries, the shortage has not been global and the United States looks well supplied. Yet, rich nations have a powerful economic incentive to nudge falling Brent down even further from its $126 a barrel peak in April.
With the summer driving season getting underway, the IEA decision looks to have some political merits. Costly crude has been among the leading culprits restraining growth. And, governments are running out of ways to rev their economies. America and Europe need fiscal tightening. Another bout of monetary easing by the Federal Reserve probably wouldn’t help much.
Tapping the world's emergency stockpiles absent a real emergency is risky. Saudi Arabia has already said it will boost output to around 10 million barrels a day, leaving it with only 500,000 barrels of spare capacity, according to Goldman Sachs. Deploying government reserves of consuming nations also eats into this cushion, giving less flexibility to respond to future oil shocks.
So far, the IEA is using only a tiny fraction of its ammunition. Member nations have 1.6 billion barrels held for emergency use, so Thursday's move deploys less than 4 per cent of their war chest. Switching on government spigots should help provide consumers with some relief. But using oil reserves as an instrument of economic policy looks a rather desperate last resort.
