Asia moves to tap oil reserves

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Tomasz Janowski
TOKYO— Reuters
Published Friday, Jun. 24, 2011 9:02AM EDT
Last updated Friday, Jun. 24, 2011 9:09AM EDT

Asian nations moved to release emergency oil stockpiles on Friday as part of a rare global co-ordinated action by consumer countries to prevent high energy prices from stunting a stuttering economic recovery.

The move, led by Washington and criticized by the oil industry as an unnecessary distortion of markets, suggests a fundamental shift on the part of industrialized nations toward intervention in commodity markets as an economic policy tool.

Brent oil prices edged back up on Friday after tumbling to a four-month closing low on Thursday, reflecting doubts that the unexpected decision by the International Energy Agency to release 60 million barrels over the next month would have a long-term impact.

Japanese Economics Minister Kaoru Yosano said the move was a warning to speculative buyers but India’s Oil Minister S. Jaipal Reddy doubted the action would have an impact.

“Even if there is a slight increase in production (supply), those gains will not be made available to us because of unbridled speculation in the financial markets of the world,” he said. “We don’t know whether this (weaker oil prices) is a stable trend.”

The stock release is only the third in the 37-year history of the agency that was set up as a counter weight to exporting group OPEC.

IEA Asian members Japan and Korea said that from next week they will start releasing oil reserves in line with the agency’s targets.

Japan will cut the reserve requirement for oil companies by 7.9 million barrels over the next 30 days and South Korea will release 3.46 million barrels, together providing about 19 per cent of the IEA target.

Australia and New Zealand, the remaining members from the Asia-Pacific region, are not participating.

The news follows a Group of 20 agreement, struck in Paris on Thursday, to tackle high food prices by boosting farm output, food market transparency and policy co-ordination.

The G20 deal is another sign that global policy makers are reaching beyond traditional economic policy tools to sustain global growth.

The world economy, recuperating from the 2008-2009 global financial and economic crisis, has shown signs of losing traction in recent months and the Federal Reserve acknowledged that this week by cutting its forecasts for growth in the world’s biggest economy.

High commodity costs that sap consumers’ spending power and squeeze manufacturers’ profit margins are blamed for much of the slowdown.

Industrialized nations managed to pull their economies from the brink of depression by dishing out trillions of dollars in stimulus packages and slashing borrowing costs to record lows.

But that left rich economies from Japan to the United States with huge debt and few policy options if their economies were to weaken again.

While the release of oil was spearheaded by the United States and other developed nations, booming emerging powerhouses such as China and India are also set to benefit as they try to contain stubbornly high inflation without sacrificing too much growth.

“To some extent, it will help lessen some inflation pressure facing Asian countries and it is also good news for the global economic recovery,” said Gong Jialong, former chairman of a body representing China’s petroleum industry body.

Mr. Gong and others, however, compared the move that will increase daily supply by nearly 2.5 per cent to currency market intervention. It is not something that could reverse a broad trend but it could help prevent excessive price moves.

“The hoped-for impact is not to induce a downward trend in commodity markets, but instead to head off potential price increases stemming from the increase in third quarter demand,” said PFC, a Washington-based energy consultancy.

Seasonal oil demand ramps up in the third quarter as refineries prepare for the northern hemisphere winter when heating consumption peaks.

Another factor suggesting that the IEA decision will only have a short-term impact on prices is that oil faces an incremental increase in demand now that several countries are turning away from nuclear power generation following Japan’s crisis, a Japanese government official said.

“Demand for fuel will rise globally with more countries unable to rely on nuclear power as much as that had initially hopes. That means prices have more reason to rise further than decline,” he said. He declined to be identified because he is not authorized to speak to the media.

JPMorgan Chase, however, said that even some cooling effect on prices would prove a boon to the world economy.

“If our projections are realized, the IEA release provides the equivalent of a $140 billion stimulus to consumers,” it said in a note. “The release will prove stimulatory to the global economy, particularly for emerging markets and the U.S.”

The IEA decision was the culmination of a plan that President Barack Obama put into motion more than a month ago, and shows the deepening concern among rich nations over the economic damage from high energy costs.

Obama drew immediate criticism from the oil industry and Republicans, who called it an ill-timed misuse of stockpiles that risks leaving the government with less ammunition should a deeper supply crisis emerge.

Oil prices have risen 20 per cent over the past year, pushing U.S. retail gasoline prices to $4 a gallon.

While Brent crude peaked above $125 in April, it has since fallen sharply. After dropping a further 6 per cent on Thursday, prices are only a little higher than mid-February, just before the Libyan conflict began.

The IEA said the action would fill shortages caused by the Libyan conflict and get oil quickly to market while Saudi Arabia makes good on its pledge to pump more oil.

The 28-nation agency will decide whether to release more oil in a month.

The previous two releases followed abrupt shortages caused by the first Gulf War in 1991 and by Hurricane Katrina in 2005, and the global response was swift. In this case, it has been over 3 months since Libya’s exports stopped.

The United States will provide 30 million barrels from its huge 727-million barrel crude reserve, about 1.5 days of U.S. consumption, with Europe supplying 30 per cent in crude and refined products and the rest from Pacific OECD nations.