IEA looks to pour oil on troubled markets

Opinion by Energy Voice

FEW readers of Energy will be particularly familiar with the work of the International Energy Agency (IEA).

The Paris-based body usually maintains a low profile, although economists like me make extensive use of its energy statistics and publications.

Founded in response to the 1973/4 oil crisis, the IEA’s initial role was to help countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks to the markets. It has expanded and diversified its activities significantly since then.

The IEA has 28 members, most are also members of the OECD (Organisation for Economic Co-operation and Development) – basically the rich countries of the west.

Russia, China and oil producers such as Saudi Arabia are not members.

A few weeks ago, the IEA surprised the oil industry by agreeing to release 60million barrels of oil from emergency stocks, primarily to offset the loss of production from Libya. About half of that oil will come from strategic reserves in the US.

The IEA and OECD had become increasingly concerned about the negative impact of high oil prices on world economic growth. Although the Chinese and Indian economies continue to do well, many western counterparts, including the US, UK, Greece and Italy, are struggling.

This is only the third time that the agency has taken such action since it was established in 1974.

The first was in 1991 during the Gulf War, and the second in 2005 following the Hurricane Katrina disaster in the US.

The IEA decision followed an acrimonious meeting of the Organisation of Petroleum Exporting Countries (OPEC) in June, when Iran and Venezuela blocked attempts by Saudi Arabia to increase production quotas. OPEC member countries obviously benefit from high oil prices and some did not want to do anything to bring them down.

In an edition of Energy last year, I said that the cartel had become a more effective organisation, but it now seems to be disintegrating once again.

World oil prices rose steadily in the first part of this year, with Brent crude increasing from $95 per barrel at the beginning of the year to $120 in April. Prices fell by about 7% after the surprise IEA announcement. However, they have crept up again and at the time of writing, Brent was selling at $117 per barrel.

In relation to oil prices, therefore, the IEA’s action seems to have been unsuccessful. In relation to oil production, the official OPEC quotas are something of a charade. Some members exceed the agreed quotas – openly or by subterfuge.

Saudi Arabia is much more sympathetic to the views of OECD and IEA, and more willing to implement long-term supply strategies than countries such as Iran and Venezuela. It has invested heavily in spare capacity, enabling it to respond quickly to changing market conditions.

Despite the OPEC refusal to increase quotas, my understanding is that Saudi production is currently about 900,000 barrels per day higher than at the time of the group’s meeting on June 8.

I was surprised at the IEA decision to release 60million barrels of oil from emergency stocks and believe that it will prove to be a short-sighted mistake. The agency should not be interfering in oil markets on a short-term basis because that could actually result in more price volatility.

We could end up in a situation where OPEC members try to second guess IEA members and vice versa. What happens when the 60million barrels have been consumed? Will the IEA put more oil on the market? How will the US and other countries restore depleted emergency reserves? Will prices rise when those reserves are restored?

The IEA has done excellent work on encouraging energy conservation. The agency should also be encouraging member countries to invest in increasing energy production capacities – oil and gas, renewables, possibly even nuclear – rather than becoming yet another short-term speculator on oil prices.

o Tony Mackay is the managing director of economists Mackay Consultants