WHAT IEA HAS TOLD THE OIL MARKET

At least it did something. At least the International Energy Agency demonstrated that it will, under certain circumstances, call for release of oil from strategic storage. It is safe to conclude that, under those circumstances, strategically stored petroleum represents potential supply.

Feb. 18, 1991

3 min read

For making that much clear, IEA deserves applause. Late last year it looked as though all the agency would do in response to Iraq's invasion of Kuwait was hold meetings, proclaim the absence of physical shortage, and ratchet down estimates of fourth quarter demand as the market adjusted to its biggest disruption in modern history.

THE PRICE SLUMP

Furthermore, IEA's Jan. 16 decision to activate a 2.5 million b/d stock drawdown and demand restraint plan no doubt contributed to the crude oil price slump that followed the start of air attacks against Iraq. But it cannot have contributed much. By the time IEA acted the market had contracted, Saudi Arabia and others had replaced lost Iraqi and Kuwaiti exports, and industrial world commercial stocks had not only not nosedived in the fourth quarter of 1990 as everyone expected, they had not even made seasonal declines. The last remaining crude price prop fell when the anti-Iraq coalition's early air battle successes eased fears for Saudi production facilities. So why, on Jan. 16, did the market need a 2.5 million b/d offering from IEA?

The issue is not whether IEA misread the market. Everyone misread the market. Everyone expected prices to spurt once the anti-Iraq coalition responded with bombs to the Kuwaiti invasion, even though IEA's own market analyses were documenting the market contraction and developing surplus. And technically, prices did spurt; they just didn't stay high very long.

The issue is the set of circumstances that properly triggers IEA release of strategically hoarded petroleum. Those circumstances are clearer now than they were before Aug. 2. And they need serious review.

IEA requires strategic inventories to support a crude oil sharing program that's supposed to take effect under fuzzily defined conditions of shortage. It was apparently on that basis that IEA didn't act last September and October, when the market was squeezing 1.2 million b/d out of fourth quarter demand due to supply jeopardy attending loss of Iraqi and Kuwaiti exports. As IEA said, there was no physical shortage. The market was working.

Yet if fourth quarter 1990 wasn't it, there never will be a proper time to tap strategic inventories. President Bush's announcement of a 5 million bbl test of the Strategic Petroleum Reserve-which IEA should have reciprocated-was more significant to the market in September than IEA's promise of a more extensive drawdown now.

LESSONS FOR THE FUTURE

Warfare may yet spread to key shipping lanes and production facilities, pinching supplies again and necessitating further market corrections. If so, 2.5 million b/d of oil from strategic inventories certainly will be welcome. And market participants are learning much that will help them in future crises. They have some assurance, for example, that distribution systems work. And they now know that there are circumstances under which they can anticipate supply from strategic inventories.

But what about those circumstances? IEA has demonstrated that strategic inventories represent a wartime oil stash, that supply and demand don't matter much in decisions regarding their use. Given the record, the market cannot count on strategic supplies unless and until bombs fall. Is that IEA policy? If not, what is IEA policy, and why didn't it work this time? Clarifications are long overdue.