September 12, 2012 1:03 am

The IEA – deterrent or political weapon?

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Member countries are hotly debating the releasing of reserves

Can the US and Europe release their strategic petroleum reserves for purely political reasons?

The question is a hotly debated issue among policy makers and officials at the International Energy Agency (IEA) and the answer could shape oil prices this autumn.

Since its creation nearly 40 years ago, the IEA has seen itself as a deterrent to the politicisation of the oil market.

Henry Kissinger, the pugnacious former US secretary of state who helped to found the organisation, wanted a deterrent to the so-called Arab oil weapon after the embargo of 1973-74 that triggered the first oil crisis. But rather than a deterrent, the US, France and the UK are now testing whether they could use the IEA’s strategic oil reserves as a political weapon.

Few disagree the oil market is short of supplies. As the G7 said recently “certain supply disruptions” are propping up oil prices above $115 a barrel. “Certain supply disruptions” in reality mean the US and European sanctions on Iran, which have taken Tehran’s oil production to a 22-year low of 2.8m barrels a day. The sanctions-induced disruption equals to slightly more than 1m barrels a day – or nearly as much oil as the world lost in 2011 during the civil war in Libya.

The IEA member countries – led by the US, Japan, Germany, South Korea, the UK, France, Italy and Spain – are debating whether they could – and should – tap their strategic reserves to offset the very disruption they created with their Iranian sanctions. The debate goes as far as whether the IEA should use its reserves to increase the pressure on Iran by pushing oil prices down so as to curtail the country’s oil revenues.

Germany and the US are on the opposite side of this debate. Berlin maintains that the use of the reserves in such an overtly political fashion will backfire. The IEA countries will face retaliation by producers, whether in the form of the whole of Opec or a faction of hardline countries within the oil cartel.

The US has a different view. Washington has the support of London and Paris. Tokyo and Rome are backing Berlin.

The IEA has used its reserves for political means in the past. It released oil after the bombing campaign against Iraq, which had invaded Kuwait, in January 1991. And it did the same during the civil war in Libya, after western countries imposed an embargo on Muammer Gaddafi’s oil.

But the use of the reserves now will be different from Iraq in 1991 and Libya in 2011. First, the sanctions against Iran are not universally shared within the IEA membership as Japan and South Korea continue to buy Iranian oil. In the cases of Libya and Iraq, all members were in favour. Second, the IEA only intervened when the military conflict had started in 1991 and 2011, rather than before it.

The debate will not only be important in deciding whether western countries release oil from their reserves in the next few months, but also about the future of the IEA.

javier.blas@ft.com

The Commodities Note is a daily online commentary on the industry from the Financial Times.

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