Oil prices slip and slide as IEA begins reserve sale

The International Energy Agency's sell-off is having the desired effect - but will it continue in the long-term?

by Emma Haslett
Last Updated: 22 Aug 2011
Drivers, start your engines: it looks like motoring might be about to become affordable again. Well, temporarily, at least. The price of oil (finally) plummeted last night, with Brent Crude dropping by almost $7 to ‘only’ $107.26 a barrel. That’s because the International Energy Agency, a group of 28 of the world’s richest oil-consuming countries, said its members are planning to sell off some of their reserves on the global market, temporarily increasing global oil supply by 2.2% or 60m barrels. The sell-off is in response to the ongoing crisis in Libya – but members of Opec, the cartel of oil producing countries, are hardly likely to welcome it…

This is only the third time the IEA has asked its members to sell off their reserves since the 1970s. By law, each one has to have enough spare oil to last 90 days without imports – but according to the IEA, they have about 146 days’ worth of reserves, so this shouldn’t affect them too badly. Although these things are all relative: the US will release a respectable 30m barrels from its Strategic Petroleum Reserve, while the likes of France, Germany, Italy and the UK will only contribute 3m apiece. Aah.

It’s not the first time the IEA has sought action in response to the Libyan crisis, though. Several weeks ago, it warned Opec members they needed to increase output quotas in order to make up for the estimated 1.5m a day taken out of production by the crisis. But at a meeting in June, Opec unexpectedly refused (except for Saudi Arabia, which is expected to increase production by about 1m barrels a day shortly), leaving the IEA in an uncomfortable position, particularly as the US summer driving season, when oil consumption increases, approached. As Julian Lee, from the Centre for Global Energy Studies puts it: ‘The IEA is saying to Opec: "If you don’t do something, we will".’

The idea with the oil reserve sell-off is that it’ll give the Saudis a bit of room for manoeuvre to increase output. But an unfortunate side-effect is that it could also end up provoking the rest of Opec. Despite the fact that the IEA insists it consulted with producing countries before it made its decision, chances are that the likes of Venezuela, Algeria and Iran will just see it as unnecessary meddling in the market. Some observers have suggested that in the long-term, it could actually serve to drive prices up.

In the short-term, though, it should give the stock-market a boost – rather like Greece. The FTSE 100 is up today, after Greece reached a deal with inspectors from the EU and the IMF to receive more money. The agreement means it’ll have to impose even stricter austerity measures, but will give it (and the Eurozone) breathing room to the tune of €12bn. The only catch is that, unless it’s received by mid-July, Greece will be forced to default on its sovereign debt, which many see as inevitable, anyway. The rescue party had better set out soon: it’s a long walk from the IMF’s HQ in Washington, and with oil prices as they are at the moment, the aid payment will barely cover the cost of petrol.

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