Drip, drip, drip—the sound of emergency oil hitting the market
23 Jun 2011
The International Energy Agency announced today that its member countries—the OECD, or the world’s richer countries—will release 2 million barrels per day of oil from their emergency stocks, for a trial run of 30 days, to make up for the loss of more than 1 million barrels per day of Libya’s sweet, light crude.
The IEA has taken this step of tapping emergency stocks only twice before—during the 1991 U.S. war with Iraq, and after Hurricane Katrina hit the Gulf of Mexico in 2005.
The agency said this is a temporary measure, until other production is ramped up—such as from Saudi Arabia, whose oil minister claimed it can supply “whatever the market needs.”
The loss of Libya’s oil is “peanuts compared to previous supply disruptions,” as the Daily Reckoning puts it—and the world weathered most of those disruptions without relying on emergency stocks. The Iraq war was a pretty big disruption—a loss of 2.5 million barrels per day (at right, data from the U.S. Energy Information Administration).
I take this new decision by the IEA as a sign of how seriously they take the current high prices of oil, and a bad sign for the world economy. We’ll see if Saudi Arabia and Russia—the world’s two biggest producers—boost their production much. My guess is that any boosts will be small and short-lived.
The agreement that IEA members make “requires IEA member countries to hold oil stocks equivalent to at least 90 days of net oil imports to hold oil stocks equivalent to at least 90 days of net oil imports,” according to the agency’s 2011 report, “IEA Response System for Oil Supply Emergencies” (link to 4.2 MB pdf).
According to the emergency response report, IEA member countries hold a total of 4.2 billion barrels of stocks (click image at right to enlarge)—which is a lot more than 60 million barrels they’re planning to release over the coming 30 days.
But to put those billions of barrels in perspective, the world now produces about 30 billion barrels per year. If world production dropped off—for whatever reason—by, say, one-tenth, and IEA countries used the emergency stocks to make up the shortfall, the stocks would only last about 18 months.
I hope the IEA does not burn through too much of their emergency stocks soon. I think we may be in for a long emergency.