IEA versus Opec Premium

The cartel’s allegation of market distortion is more than a little ironic

Words such as pot, kettle and black spring to mind when hearing Abdullah al-Badri criticise the International Energy Agency’s decision to release oil inventories as distorting the market and akin to a “weapon”. As secretary-general of the Organisation of the Petroleum Exporting Countries, he is head of a cartel whose raison d’être is manipulating the oil market. The cartel’s power peaked during its self-described use of the “oil weapon” in 1973.

There is a morsel of truth in Opec’s accusation, though. While the IEA is technically acting within its mandate by responding to a physical supply disruption in Libya – just as it did on the two other occasions when it sanctioned releases (the first Gulf war and hurricane Katrina) – there are political overtones this time. In uncharacteristically strong language, the IEA warned oil producers in late May to boost output. Opec then thumbed its nose at consumers three weeks later, sending the oil price, already near a three-year-high, surging.

Those chiding the IEA for using emergency supplies as a price management tool have a point, but they should consider the context. The IEA’s 28 member states finally have shown some backbone at the cost of only a small diminution of their reserves. Even if the price impact of the IEA’s move only lingers for a month, the hit to Opec countries’ coffers would come to about $5bn – quite a wake-up call. The IEA’s future communiqués will have more heft.

Bravo, then, to the IEA. Calling Opec’s bluff once in 38 years, and doing so in the interest of consumers, does not a manipulator make. First proposed as an “energy Nato”, it has opened fire in self-defence. Though Mr al-Badri was not among the hawks at Opec’s last meeting, he has surely heard the term “collateral damage”.

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