With oil prices remaining elevated as the war in the Middle East continues, the International Energy Agency on Wednesday announced the coordinated release of global petroleum reserves to reduce gas prices.
The IEA’s 32 member nations will release 400 million barrels of oil out of the combined 1.2 billion barrels in the reserve, the agency announced. It’s a significant amount, almost equal to the 421 million barrels that the U.S. currently has in its reserve out of its 714 million-barrel capacity.
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But when the total is considered in the context of global supply and demand, it still is a modest amount.
Such a move will slow rather than stop rising oil prices and offer a temporary salve to the searing burn of rising gasoline prices.
More important, it is critical not only to look at the total number of barrels released but also to examine the near-term flow and regional skews that will occur over the next 30 days.
Each economy will pursue its own interests. Investors should anticipate subsidies for gasoline purchases, rationing and gas tax holidays at a minimum to accompany the coordinated release.
Collective action requires cooperation and no ex-post reneging for the historical release of strategic petroleum reserves.
If one looks at the allocation of the Group of Seven’s 1.1 billion barrels of reserves, the U.S. holds 41%, Japan 26%, France 12%, Germany 11%, Italy 7% and the UK 4%.
Watch near term announcements by all G7 fiscal authorities for further steps to mitigate the energy shock.
This is a busy time, but there is no panacea.
The only duration that matters right now is how long the Strait of Hormuz remains effectively shut and the war continues.
Tapping the reserves
Wednesday’s announcement is a familiar response to a pricing squeeze, one that the United States has done five times over the past 20 years.
But does it work? The record is mixed.
One success came after Hurricane Katrina in 2005, when a targeted release helped pull prices back from a high of $3.07 per gallon to $2.68 within a month.
But in 2011, in response to the civil war in Libya that, like Wednesday’s announcement, was part of an international effort, the release pushed gas prices down by 6%, only for them to return to their previous level two weeks later. Gas prices went up from there.
More recently, the U.S. ordered two releases, in 2021 and 2022. The November 2021 release, which was also done in coordination with other countries, was announced to combat the surging inflation of the pandemic era. But even though the U.S. released 50 million barrels of oil, the move failed to prevent gas prices from continuing to rise.
Then in March 2022, in response to the war in Ukraine, the U.S. released a record 180 million barrels of oil in two phases, but that, too, ultimately failed to prevent gas prices from hitting an all-time high of $5.01 per gallon in June of that year.
Still, the move had some effect. Treasury economists estimated it shaved perhaps 13 to 42 cents off the peak, even if consumers did not feel the impact.
The takeaway
The underlying math explains why releasing oil from strategic reserves has had a mixed effect.
The U.S. consumes roughly 20 million barrels of oil per day. Even the most aggressive release, like in 2022, amounts to only a few weeks of supply, making it insufficient to offset pressures working to push up prices.
