Challenges to Global Emergency Stocks Release

After its diplomatic push with producer nations failed to bear fruit, US officials are exploring whether coordinated action with other consumer countries could address concerns over high oil prices. But without a specific supply disruption, convincing other countries to put emergency stocks on the market may be difficult.

Energy Intelligence understands Washington has reached out to multiple consuming nations for possible coordinated releases of oil from strategic stocks, an attempt to address tightness in the market — and lower prices.

US officials have been tipping possible coordinated action in recent weeks.

“We had a broad discussion about the tools available with other energy consumers and we'll see what happens,” US National Security Adviser Jake Sullivan said Nov. 1 following the G20 summit in Italy.

“I’m dealing with other countries,” US President Joe Biden said Nov. 6. “At an appropriate time I will talk about it,” he said, noting “we can get more energy in the pipeline ... figuratively and literally speaking.”

But coordinated releases facilitated by the International Energy Agency (IEA) are very rare. It has occurred only three times since the OECD group's 1974 inception (see box). The most recent release was more than a decade ago.

Those types of IEA releases were originally intended to address interruptions, not a simple increase in demand, several observers point out.

Analysts also note that current crude oil prices around $80 per barrel are hardly exceptional, with much of the action in the futures contract markets more based on expectations that supply could tighten over the winter than based on actual shortages.

Moreover, there is a risk, some say, that by using reserves to combat prices — rather than make up for a physical disruption — big oil consumers could prompt producers to cut back on their supplies further to keep prices to their liking.

Consumer Diplomacy

US strategic stocks are relatively large compared to those in other OECD countries, making a decision to tap them a bit easier in Washington than elsewhere. And the US can add barrels to the market in other ways: For example, front-loading mandated sales or conducting exchanges or test sales.

“When Washington wants to do something, almost all of the overseas partners are much more reluctant, especially in Europe where the products reserves are comingled with commercial [stocks] in many cases,” Kevin Book of Washington-based consultancy ClearView Energy Partners said.

When it comes to adding barrels to the market, “they have a lot of options in terms of how they can do it, and the hardest one of all is the internationally coordinated release,” he said.

The Japanese government has so far only released stockpiles during oil supply disruptions — such as the 2005 release following Hurricane Katrina — or during domestic emergencies, such as after the Fukushima earthquake and tsunami. The government usually works in a coordinated release with other IEA members. If the IEA decides to launch a coordinated release by member countries, Japan will follow.

How Big an Impact?

If the US can somehow convince other countries to join in a release — or even go it alone — a lot of crude and refined products can be brought to market as OECD members alone can in theory mobilize up to 1.5 billion barrels.

Even if there is a release, emergency government stocks in the US and the barrels of countries held in commercial stocks speak differently to the market, points out Columbia University’s Jonathan Elkind, a former assistant secretary for international affairs at the US Department of Energy.

“When the SPR [strategic petroleum reserve] is activated and there’s a drawdown, those are new barrels in the market,” he said. In countries where reserves are in commercial stocks, the effect is more muted because companies already held the supply.

Outside OECD countries, Beijing has recently been demonstrating that it can use its stocks, even if it has only done so in a limited way. China recently released gasoline and diesel stocks, after its first strategic reserve auction in September. That auction found takers for only 5 million barrels of the 8 million on offer.

Who Is the Audience?

US officials’ threats to release oil ahead of the Nov. 4 Opec meeting didn’t persuade Riyadh. But they also haven’t convinced everyone at home. Domestic producers who would suffer from lower prices would be hurt by a dip.

And a release of oil stocks doesn’t address the most acute energy crisis of the moment, which is caused by a natural gas crunch in Europe and Asia.

Instead, the White House may be trying to demonstrate that Biden is keen to help US consumers, at a time when concerns over inflation are becoming a political problem.

“What really seems to be happening is signaling to voters here in the US,” Book said. From a political perspective, the strategic stocks talk “doesn’t have to be effective at changing markets so long as it changes minds at home.”