By Vivian Ni
Jun. 27 – The International Energy Agency (IEA) said it had consulted Saudi Arabia, China and India before it made the decision to release 60 million barrels of oil reserves in the coming month. It has also invited China – the world’s second-largest oil consumer – to join the IEA and contribute, together with other member countries, to stabilizing global oil prices.
On the sidelines of the second Global Think Tank Summit held in Beijing between June 25 and 26, the IEA’s executive director Nobuo Tanaka said all three countries the agency had consulted “understand” and “appreciate” the action of an oil release, which aims at filling the significant supply gap caused by the unrest in Lybia and supply disruptions in other oil producing countries.
Tanaka also said he once again asked China to join the IEA, but has not received an official response yet. As a major oil consumer whose production costs can be heavily impacted by the altitude of oil prices, China has recently welcomed the release of the IEA’s strategic oil stockpiles. However, it remains unclear if China will actually join IEA’s efforts, and the country’s membership issue has not made much progress after being brought up several times.
IEA members achieved the agreement to release 60 million barrels of oil reserves next month after the Organization of Petroleum Exporting Countries (OPEC) failed to agree on an official increase in oil production quotas this month. The United States, which lead the oil price control efforts, will provide 50 percent of the released oil reserves. Japan, Germany, France, Spain and Italy will be providing most of the rest.
U.S. Energy Secretary Steven Chu said the United States will “continue to monitor the situation and stand ready to take additional steps if necessary.” The country’s special petroleum reserves currently stand at a record high level of 727 million barrels.
News of the IEA’s strategic release has brought a bearish prospect to the oil market. Brent crude prices plummeted by 7.4 percent to US$105.72 per barrel after the IEA announced its decision on June 23, and analysts expect the release to have a further-reaching impact that will keep driving the market downwards in coming weeks and months. Bullish speculations earlier that oil prices may march up to US$120 per barrel have been quickly switched to predictions that prices will drop beneath US$100.
A recent commentary in the Financial Times (FT) commented that the release is leading the global oil market to “enter a new era.” The IEA, set up in 1974 as a counterbalance to the OPEC, is improving its role. While it used to only take actions in the most extreme circumstances, it has now been functioning more actively to reduce the risks of an oil price surge in the future.
According to the FT commentary, this is only the third time that the IEA has used a strategic petroleum reserve release since its establishment. The first release was in 1991, when the First Gulf War started, and the second release took place in 2005 after the catastrophic hurricanes Katrina and Rita crippled oil production and refining capacity in the U.S. Gulf of Mexico.
Experts do not see much possibility that the IEA’s action may crash the oil market, predicting the release will only impose a reasonable ceiling to the oil prices. They emphasize that, despite the release and extra production from Saudi Arabia, the growth in oil demand is still considerable especially in emerging economies such as China and India. A recent report in the Wall Street Journal also pointed out that demand for crude oil, various metals, and natural resources in China and India are projected to grow by 500 percent in the next 20 years.