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OIL & GAS US faces stiff opposition to emergency oil release plans

Japan, South Korea oppose tapping emergency stocks to quell rising energy prices

Reuters
August 18, 2012
Image Credit: Bloomberg

Houston/Washington: US President Barack Obama faced stiff resistance to the possibility of releasing emergency oil reserves to quell rising energy prices on Friday, with Asian allies and the head of the West’s energy agency rejecting any need for action now.

A day after Reuters reported that the White House was “dusting off” plans for potentially tapping the Strategic Petroleum Reserve, the executive director of the International Energy Agency, Maria van der Hoeven, was blunt in her assessment: “There is no reason for a release.”

The IEA “bases our actions on data and reality. The market is sufficiently supplied,” she told reporters in Houston. She said she had not discussed a potential release with members of the Paris-based IEA, which is charged with coordinating use of consumer nations’ strategic inventories.

But if US gasoline prices, currently at about $3.80 a gallon, keep rising ahead of the November 6 election, Obama could face increasing pressure to use the SPR to ease prices.

Republicans would likely blame the oil rise on Obama’s delaying the Canada to Texas Keystone XL pipeline and putting restrictions on offshore drilling after the BP oil spill.

“That could push the administration to at least increase the frequency of references to an SPR release,” said Kevin Massy, of the Energy Security Initiative at the Brookings Institution.

Prices for Brent crude tumbled as much as 2 percent to below $113 a barrel on news the United States was considering a release from reserves, then erased some of those losses following van der Hoeven’s comments. By Friday afternoon in New York, it was down about $1 at just above $114.

Key members of the IEA offered varied views, reflecting a divide between those who have tended to favour a more liberal use of the world’s government-held stocks as a means to influence prices and aid economic growth, and those who believe they should be strictly reserved for supply emergencies.

While Britain and France appeared open to discussing the possibility of action, officials in Japan and South Korea said on Friday they saw no cause for action.

“It is not as if Japan is short of oil,” said a Japanese government source who declined to be named due to the sensitivity of the matter. “Stock releases are not done when the price is high but when supply is insufficient. Supplies are sufficient now.”

On Thursday, a source with knowledge of the discussions said one reason the White House was reviving old plans on reserves was to prevent rising energy prices from undermining sanctions against Iran over its nuclear program.

A European Union embargo on Iranian crude oil took full effect on July 1 in a joint effort with the United States to force Tehran to curb nuclear activities that the Western powers say pose a military threat, despite Iranian denials.

US officials will monitor oil markets to see if gasoline prices fall after the September 3 Labour Day holiday, the source said.

White House spokesman Josh Earnest said on Friday that tapping the SPR was “an option that is on the table.”

What remains unclear is whether Obama would be prepared to press ahead with action without the full support of the IEA.

Van der Hoeven noted that total US oil reserves exceeded the mandated 90-day level required by the IEA, and that Washington was not prohibited from acting alone.

“They are American supplies. They can be used for domestic reasons and for the solution of domestic problems. It’s up to them,” she said. Asked if any other IEA members were considering tapping their strategic supplies, her answer was a simple “No.”

Still, today’s energy picture mirrors last year’s when Obama won IEA support for releasing 60 million barrels of oil weeks after Libya’s civil war had shut exports, an analyst said. The loss of about 1 million bpd of Iranian oil due to the sanctions is roughly the same amount as the loss of Libyan oil last year. Oil prices are on the rise, and OECD economies are showing signs of weakness.

“If IEA member countries could come to an agreement in 2011, the current circumstances would appear adequate to lead them to do so again this year as well,” said Blake Clayton, an energy and national security fellow at the Council on Foreign Relations in New York.

Obama first approached British Prime Minister David Cameron and other allies about a possible joint stock release in March, as officials feared that new sanctions on Iran and the onset of the summer demand season could cause a new surge in oil prices, dealing a new set-back to a still-fragile global economy.

In May, the Group of Eight nations put the IEA on standby for using stocks, but ultimately it proved unnecessary. Oil prices fell as extra Saudi supplies and weak demand offset the loss of more than half of Iran’s exports.

The decline in Iran supplies has been gradual and global commercial oil inventories remain relatively well-supplied for this time of year.

However, benchmark Brent prices rallied more than 30 percent over the past two months, near their $120 a barrel price level that seemed to open up the reserve debate in the spring.

The focus on price, rather than only supplies, is a shift in approach that analysts say has been evident since last year, when Obama won IEA support for the drawdown. It was only the third such action in the IEA’s history.

But in some parts of Europe, which is struggling to revive economic growth at a time when rising oil prices and the falling euro are delivering near record energy costs, the notion of seeking lower prices as a form of stimulus may be finding favour.

Britain’s energy ministry said it was prepared to ask the IEA to act to deal with high oil prices, but added that no decision had yet been made on any release of stocks.

“The market remains very tight,” a British ministry spokesman said. “This has a knock-on impact on the oil price and therefore the global economic recovery.”

France and the United States are in contact on recent oil price rises, a French official said.

“We are consulting our American partners on all issues, including containment of oil prices. All options are being studied,” an official at the offices of President Francois Hollande told Reuters, speaking on condition of anonymity.

Japan and South Korea are among Iran’s top oil buyers and have cut imports to gain waivers from US sanctions.

Despite having to rely on costly alternatives to Iranian oil, South Korea did not believe prices were high enough yet to warrant a release, a government source said.

“I don’t think any member will agree to the oil release at current price levels, considering the release was not made a few months ago when oil prices hovered at much higher levels,” said the source, who also declined to be named.

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