U.S. and international energy agencies are signaling they will not release oil from strategic petroleum reserves, despite reports that some tankers are refusing to enter the Persian Gulf. As consuming and producing nations watch anxiously, prices have continued to drift below prewar levels on assumptions that the war will be short.
Washington, 21 March 2003 (RFE/RL) -- World oil prices nervously followed the news of war in Iraq as major nations signaled that there was no need to tap their strategic petroleum reserves.
In the early hours of hostilities, oil markets continued to ease back from their prewar price highs on assurances that supplies were sufficient to cover the loss of Iraqi production for a month or more.
The cooling trend was evident early on 18 March, when prices slipped to three-month lows on reports that the Organization of Petroleum Exporting Countries (OPEC) had suspended its quotas, leaving members free to pump as much as needed to offset any shortfall. In London, North Sea Brent crude traded as low as $25.53 a barrel, marking the second day below $30, the AP reported. Before the war, some experts warned that prices could top $60 a barrel.
In coordinated statements, the Paris-based International Energy Agency (IEA) and the U.S. Department of Energy praised the OPEC steps to keep the market on track. U.S. Energy Secretary Spencer Abraham called world energy supplies "more than adequate," even if Iraqi forces sabotage the country's oil wells. The statement was seen as a sign that the United States saw no immediate reason to release oil from its 599-million-barrel Strategic Petroleum Reserve.
The 26 nations of the IEA hold emergency stocks of 1.2 billion barrels. In an RFE/RL interview, IEA spokesman Pierre Lefevre says the amount is enough to cover 115 days of global imports.
While the reserves are meant to give assurance, so is the decision to keep them in reserve. The IEA's Lefevre says his organization's position "is to recommend a release only in case of a real physical supply disruption and if we consider that the producing countries are not in a position to cover a shortfall." A spokesman for Abraham declined to go beyond the department's prepared statement.
Producing countries like Russia, which depends heavily on oil prices, are watching developments as closely as consuming nations like the United States. If Western nations feel forced to release reserves, the drop in prices could be dramatic, threatening budget trouble for Moscow if the effect is prolonged.
But the market also showed how suddenly it can turn around. After the U.S.-based Fox News network broadcast a report that several Iraqi oil wells were on fire, world oil prices shot up by 50 cents a barrel. In a White House press briefing, spokesman Ari Fleischer said the extent of the damage was "not ascertainable at this time." Traders seemed to be ignoring the earlier statements by analysts that the loss of Iraqi oil had already been "priced in."
Under IEA treaties, individual member nations may release oil stored in excess of a mandated 90-day supply without a coordinated action, Lefevre says. Opinions about the need for a release have been mixed. Some U.S. consumer groups have called for a limited release to provide economic relief, but officials have insisted that emergency stocks should not be used to manage prices.
"The New York Times" also is raising a warning about a possible supply disruption. It reports that some shipping companies were refusing to send tankers into the Persian Gulf because of the risk, even though there have been no attacks yet.
But in an interview, Edward Morse, a former State Department official, now executive adviser at Hess Energy Trading Company in New York, said the reports of tanker problems were still "anecdotal" and that, in any case, such a disruption would not be felt in world supplies for at least 45 days. Morse said of the tanker concern, "I'm not convinced that it's going to last more than two days."
Many countries have already stepped up their imports. In Japan, for example, Industry Minister Takeo Hiranuma said 71 oil tankers were already on the water, bringing 24 days' worth of imports, the Chinese news agency Xinhua reports.
Morse said it appeared that strategic stocks would not be used. One reason is that the war coincides with a buildup in world production to offset earlier output losses in Venezuela, which is now recovering. The end of the winter heating season in the United States also means a drop in demand.
But Robert Ebel, director of the energy and national security program at the Center for Strategic and International Studies in Washington, is voicing new doubts about reports that prices should moderate because of Saudi Arabia's announcement that it had stored an extra 50 million barrels of oil for emergencies.
Ebel says, "People keep telling me there's plenty of oil out there, and I say, where is it?" He adds, "How do you get it from these storage tanks to the markets, if tanker owners are reluctant to come into port?"
While Venezuela's recovery and spring weather are factors, lower prices have also relied on assumptions that this will be a short war.
Whichever way the market goes, it seems clear the war has the potential to create huge, sudden price swings with global economic results.
Ebel says that if any release of strategic reserves becomes necessary, it will have to be coordinated closely with OPEC and particularly Saudi Arabia to avoid a destabilizing price plunge.