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As Libya's civil war continues to disrupt its contribution to the world's oil supply, the Paris-based International Energy Agency (IEA) has taken action. The IEA, which counts the U.S. among its members, announced on June 23 that it will release 60 million barrels of oil from various governments' strategic reserves, spread out over a 30-day period. The U.S. Department of Energy is supplying 30 million barrels, half the total amount, from its 727-million-barrel Strategic Petroleum Reserve (SPR).
This release marks the third time that the IEA has opened its oil reserves in response to crises. The others occurred at the beginning of the Persian Gulf War in 1991 and the aftermath of Hurricanes Katrina and Rita in 2005.
Unlike those occasions, this release comes several months after the beginning of the crisis that necessitated it. In addition, it may have other motives than taking up the Libyan slack. The decision not only comes in the midst of a market downturn, reflecting worries about the sustainability and pace of the economic recovery, but it also follows an early June OPEC (Organization of Petroleum Exporting Countries) meeting that failed to reach a consensus about increasing the world oil supply.
Experts suggest that releasing the oil into the market could drive down prices and boost the shaky economy. How would this work? After all, 60 million barrels may seem like a large volume, but it's not enough to supply one full day of the world's oil demands. Scientific American asked Jim Burkhard, the managing director of IHS Cambridge Energy Research Associates' Global Oil Group, to explain. Under Burkhard's leadership, the group analyzes the market for the oil and gas industry.
[An edited transcript of the interview follows.]
What's the purpose of the oil reserves?
The purpose of the Strategic Petroleum Reserve is to help the U.S. economy deal with a large disruption in oil supply. The SPR was created in the mid-1970s following the oil embargo of 1973, which exposed the vulnerability of both the world and U.S. economies to a severe disruption of oil. The SPR is an insurance policy to help manage any large-scale disruption.
How does what we're gaining from the reserves compare with what we're losing from Libya, whose civil war began in February?
Before the civil war Libya was exporting about 1.2 million barrels per day, so the amount of oil that's part of this release—it's 60 million barrels by all IEA members, 30 million by the U.S.—doesn't compensate for all of the oil that's been lost because of the civil war in Libya. But it is nonetheless a significant amount, at least in the time window in which the release will occur. The plan is for it to be over 30 days, which would mean two million barrels per day for a month, which, at least for that time period, would temporarily increase global oil supply by about 2 to 2.5 percent.
Do you think that the release is going to lower gas prices?
Oil prices were already on a downward trend in mid-June, but they did fall further following the IEA's June 23 announcement. But keep in mind the oil market is influenced by a vast array of factors—power shortages in China, agricultural policy in India, the weather in northern Europe—many factors shape the price of oil, so attributing too much importance on any single factor can be a bit misleading. What we can say is that, at least immediately following the announcement, it did lower prices. But whether that's sustained is a big question mark.
So do you think that its value might be more symbolic?
It does have symbolic value, it does have impact on oil market psychology, because prices for any commodity are shaped by future expectations. What do we think future economic growth will be? What do we think will be the pace of automobile ownership in China? Our future expectations play a big role in determining how much we're going to pay for something today, whether it's a barrel of oil, a car or a house. What this decision signaled is that the members of the IEA are willing, at least in this instance, to use government-controlled oil reserves, even if there's not a massive large-scale oil disruption.
What constitutes a large-scale disruption?
When it was formed, the IEA defined a large-scale disruption as removing 7.5 percent of world oil supply. So Libya falls short of that metric, but it is nonetheless a significant disruption.
Will opening up the Strategic Petroleum Reserve when it's not a large-scale disruption have implications for its future use?
Let me take a step back for a second. This release does come after several months of a significant disruption. It also comes at a time when the outlooks for the global economy and the U.S. economy have deteriorated. So this release could also be viewed as a sort of economic stimulus. There aren't too many tools left in the tool kit to stimulate the economy. Most stimulus measures around the world are either being wound down or removed. If oil prices were to fall because of this release, that would be like a tax cut for consumers, which could in effect act as a stimulus. That is, if this is successful at driving down oil prices in a sustained way.
Now, your question: There's been no statement made that this is a definitive change in policy. Again, the raison d'etre of the SPR in the U.S. is as an insurance policy against a large scale-disruption. If it were instead to be used on a regular basis to try to influence prices, that would likely, over time, diminish the capability of the reserve to deal with a large-scale disruption.
