Why the IEA should resist a US strategic oil stock release now

March 19, 2012 | 00:00

Why the IEA should resist a US strategic oil stock release now

With Presidential elections approaching, and oil prices showing no signs of dropping, the temptation for the Obama Administration to release strategic oil stocks becomes ever greater. Such a move, for short-term electoral reasons, would seriously hurt the credibility of the oil emergency scheme of the International Energy Agency (IEA), argues Matthew Hulbert. "Asian consumption of Iranian oil is the only safety valve left from making the IEA look very silly."

'If we decide to release IEA stocks now, then why not in two weeks, two months, or two years' time?' (photo: Thinkstock)
These are dangerous times for the IEA. American pressures on Iran are starting to tell, not so much in Tehran, but on global oil benchmarks. Brent prices have breached $126/b (per barrel) while WTI prices (the US reference) have been hovering above $107/b. Big numbers, but the figure that really matters is a rather more paltry $4 - the price US consumers do not want to pay at the pumps to top up the tank.

Unsurprisingly this is translating into sharp political pressures for the Obama Administration. Given broader supply side problems that will fail to plug Iranian oil market gaps, the binary policy option is becoming clear for the Democrats. Either take your foot off Iran's neck and risk looking weak in the Middle East to squeeze domestic gasoline prices under $4 a gallon - or try and win the White House on a ticket of 'expensive' oil at the pumps. Neither is a good option.

So far, President Obama is talking tough on Iran, but Washington is also pitching a very dangerous 'plan C' to get around this impasse: release of the emergency strategic stocks held under the agreements of the International Energy Agency (IEA). In recent weeks a number of senior Democratic Congressmen have been urging the Administration to take this step and there have been rumours of a US-UK deal to release strategic stocks. The closer we get to Presidential polling day, the more likely such a move becomes if Washington wants prices eased.

A short term release for political reasons is definitely not a good plan. It might make for good headlines, but if the IEA wants to be seen as more than a subsection of the US State Department, it is a move that should be resisted. The IEA's international credibility is on the line.

The strategic reserve was only ever meant to be used to fill actual (or imminent) supply shortages. This is why it was deployed in the 1990-91 Gulf War and in 2005 when Hurricane Katrina struck. Libya added a third occasion in 2011, which although controversial given no physical shortages of oil appeared, remained more or less plausible on fungibility grounds, as there was a looming shortage of certain sweet grades of crude oil. But Tripoli is not Tehran. None of these conditions apply in Iran to justify major IEA market interventions.

The main reason why Iran has created upward oil pressures is because the West, and most notably the US, deems nuclear enrichment to be a higher political priority than oil market stability. This is especially so for Southern European markets bearing the brunt of Brent price rises. In a crisis of our own making, it would be bad enough to draw on the strategic reserve purely to align short term American politics with
If Obama wants to avoid making a total mockery of the IEA, he has to look to Asia
embargo embarrassments. But it would also create a dangerous precedent for the IEA, precisely because the Iranian question is a long term game. Tehran is hedging, and will continue to hedge enrichment ambitions against the threat of major oil price spikes. Unless Israel makes a dud call and triggers a war, this game will run and run. If we decide to release IEA stocks now, then why not in two weeks, two months, or two years' time? The political fundamentals will be exactly the same in Tehran. The strategic reserve can only offer a short term fix (695 million barrels) in what remains a long term Iranian political problem.The Strategic Petroleum Reserve (SPR) is the wrong tool for the wrong job.

President Obama can of course pretend to look for fresh evidence of supply outages elsewhere to get out of his $4 a gallon fix. He has plenty of prospective problems to choose from. Nigeria has taken a turn for the worse; Iraq is struggling to find its post-Saddam feet; Syria is going down with Assad; Sudan has gone into total shutdown between ‘North and South’; Libya could follow suit between ‘East and West’.That’s while Chavez is conking out in Venezuela, as much as Russia and Saudi Arabia are maxed out in terms of current production capabilities.

As true as all that may be, it doesn’t amount to a ‘smoking gun’ to use the strategic reserve. Despite a loss of 750,000 barrels per day of non-OPEC supply over the past year, we still have no physical shortages (either in volumes or grades). Just as importantly, such supply slips have been firmly priced into the market.

So what of a US plan D? Options are admittedly in short supply, but if Obama wants to avoid making a total mockery of the IEA, he has to look to Asia. For all the US cajoling against India and China to sever oil links with Iran, Washington will be increasingly happy for Beijing and Delhi to continue sourcing Iranian oil to stabilise prices. Keeping 3 million b/d of Iranian production online from Asian off-take is the only way prices can be kept within a politically tolerable range for Washington. IEA stocks can stay in their containers; US consumers can top up the tank and keep a dime or two in their pockets.

Well, that’s the theory. In practice, things remain highly uncertain, beyond the core lessons that should be learnt here. Lesson one is that the IEA remains perilously close to being an instrument of US policy at times of choosing. Assuming America goes 'cold turkey' over its $4 a gallon affliction, Asian consumption of Iranian oil is the only safety valve left from making the IEA look very silly.

This informs lesson two: China and India are far more powerful consumers than anyone left within OECD ranks. On that basis, Europe should be very careful following a US hydrocarbon lead in future, which points to the biggest lesson of all: US 'energy independence' remains a pipedream for at least the next decade.

Back in the real world, we are currently stuck with 91million b/d production, with 100 million looking an increasingly difficult to reach. Until global supplies start hitting three figures, policy options over Iran will remain seriously limited. The veneer of US 'energy independence' has merely led Washington back to China's door to paper over domestic energy prices by buying Iranian crude. It's either that, or the US will hang the IEA out to dry for the sake of 4 measly dollars. Like it or not, IEA blushes can only now be saved by Chinese powder.

 

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