IEA SNUBS BUSH ON STRATEGIC OIL

Once again, the International Energy Agency has gone hunting for oil shortage and returned empty-handed. It will not, therefore, recommend that its members dip into emergency oil reserves. Nor will it breathe a hint of when it might do so. IEA's dawdling is unfortunate. It sabotages President Bush's earlier move to sell U.S. Strategic Petroleum Reserve crude on a test basis. And it casts integrity of the agency's oil sharing agreement into doubt.

Oct. 8, 1990

2 min read

IEA's dawdling is unfortunate. It sabotages President Bush's earlier move to sell U.S. Strategic Petroleum Reserve crude on a test basis. And it casts integrity of the agency's oil sharing agreement into doubt.

Reservations about the oil sharing pact are nothing new. The 7% shortfall trigger has always seemed arbitrary and too loosely measured. Willingness of signatories to share oil has been a perpetual question. If called upon to share oil now, Japan and Germany, possibly others, probably would balk.

If emergency measures aren't warranted now, however, they never will be. IEA devised its oil sharing system, requiring signatories to hold emergency inventories, in response to the Arab embargo of oil exports to the U.S. and Netherlands in 1973-74. The embargo certainly disrupted supplies, drove up prices, and damaged economies.

As a supply threat, though, the Arab embargo was less serious than the current disruption. With Iraqi and Kuwaiti exports embargoed, the world can't produce enough oil to meet near-term demand under economic conditions prevailing before Iraq invaded Kuwait. So the market is contracting. And with it go economic conditions.

Oil hoards and sharing agreements can't eliminate the economic sting of supply interruptions; they can, however, moderate it if managed correctly. That means recognizing emergency and demonstrating a willingness to act.

What evidence has IEA offered that it ever will recommend release of emergency supplies or implement sharing? So far it seems content to take its periodic shortage hunts and let economies stall. Oil consumption eventually will fall into line with the new supply constraints, which will seem to vindicate IEA's inaction. A shortage, after all, will not have materialized--thanks to recession no one tried to forestall.

In volumetric terms, President Bush's offer to sell 5 million bbl of SPR crude wasn't much. It didn't have to be much. This early in the crisis, markets mainly need to know that emergency inventories represent accessible future supply and not just consuming world bluff. Bush's gesture might have made the point. Without an IEA response in kind, it's just 5 million bbl.