The oil market The IEA opens the taps

THE International Energy Agency (IEA) rarely intervenes in oil markets. The rich-country energy club keeps its vast reserves of oil to tackle emergencies caused by unforeseen supply disruptions. Yet on June 23rd the IEA surprised oil markets by saying that it would release60m barrels of oil from its stockpile over a 30-day period to ensure a “soft landing for the world economy”. Oil prices duly obliged by tumbling.

Oil has been drawn from the emergency stockpile of 1.6 billion barrels only twice before—in the immediate aftermath of the invasion of Kuwait in 1999 and Hurricane Katrina in 2005. The disruption to supplies as a result of Libya’s internal conflict became apparent some time ago and the 1.4m barrels a day denied to world markets, which all together get through nearly 90m b/d, is hardly the sudden upheaval that the stocks are there to offset.

The IEA says that Libya is the reason for the decision to release stocks. Although its oil has disappeared from the market, the damage has not been fully felt yet, since the world consumes much more oil in the second half of the year as the northern hemisphere's “driving seasons” begin. The IEA reckons on a shortfall of 2m b/d as engines rev up around the globe and that a barrel of Brent crude (which slumped from around $115 to trade at $108 a barrel after the announcement) could climb even higher to wreak appalling damage on a fragile world economy.

Yet there are a couple of reasons to question the IEA’s decision. Firstly, evidence is mounting that the high price is having an effect on demand both in rich countries and even in oil-thirsty Asia and that prices might slip anyway. Second, despite acrimonious disagreement at the recent OPEC meeting between the haves and have nots of spare oil-production capacity, which meant that expected quota increases failed to materialise, Saudi Arabia has promised unilaterally to make up for most of the Libyan shortfall by pumping 1m b/d extra. The IEA says that its intervention (done with Saudi acquiescence, the agency hinted) is designed to plug the gap between now and when that oil might appear on the market.

Cynics are suggesting that Barack Obama is keener than most to tap the stockpiles—he has hinted that this is what he wants several times of late—to protect Americans from the ever more stiff cost of filling up. Indeed America, where the driving season is about to get under way, will contribute half the extra oil. Plugging a supply gap is all very well. But this sets an unfortunate precedent that the stockpiles are there to smooth the ups and downs of the oil price rather than to guard against genuine emergencies. Moreover, any interventions by the IEA cannot be sustained over the long term when (high) prices will be determined by voracious Asian demand and the difficulties of finding and extracting extra barrels from beneath the earth.

Overall, the best solution to a high oil price is a high oil price. Tinkering with that equation is rarely a good idea.