by Bob Tippee, Editor
The surprising June 23 announcement about release of strategically stored oil really shouldn't be surprising. Governments bollix energy all the time.
Since the 1970s, signatories to an International Energy Agency sharing agreement have held oil in storage for use in emergencies.
The system developed along with IEA in response to export embargos imposed for political reasons by Arab producers in 1973-74. Strategic inventories deter such mischief and buffer the market against sudden supply disruption.
But the market needs some idea about the conditions under which hoarded oil will become available. The idea before the latest release was muddled at best. It's worse now.
The emergency that might have warranted withdrawal occurred no later than in early April, when loss to the market of Libyan supply began to look deep and long-lasting. Even then, the amount of loss relative to supply available from other sources would have made strategic releases questionable. By the time IEA acted, though, prices were falling in a market that was still tight but clearly adjusting to the Libyan upset.
The only conceivable trigger was the June 8 failure by the Organization of Petroleum Exporting Countries to raise quotas. That was no emergency. Even without Libya, group production was above the quota total. Individual members able to do so had been raising production. After the messy OPEC meeting, Saudi Arabia announced it would boost output unilaterally.
In other words, the market was doing what was needed for supply. IEA acted anyway. Its motives must have been political.
So a new risk hovers over the market: capricious manipulation by governments in control of stored oil. Most of them are governments that, in the past decade or so, have been trying to engineer the climate by reengineering energy use, spending heavily on noncommercial fuels, and in some cases siphoning cash from commercial energy to fund their excesses.
These are governments that fundamentally distrust markets in matters involving energy. This is why they so frequently—and so expensively—err.
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