Based on the oil price spikes of the 1970s and 2008 oil could easily head towards $200 per barrel in the event of a similar crisis today, according to Badr Jafar, President of Crescent Petroleum.
“Such an adverse increase in oil prices will translate into an extra $110 billion monthly oil costs for IEA member states at a time when their economies still remain fragile. Such a price spike would likely precipitate another global recession and even greater economic losses as a result. So releasing $7 billion worth of oil from strategic reserves each month while supplies remain constrained would appear very worthwhile,” he added.
“Since the oil crises of the 1970s, oil consumer governments have systematically kept stockpiles of crude oil and oil products aside in strategic reserves only to be used in the event of another supply crisis. Since then emergency releases have only been made two times, in 1990 and 2005, both in direct response to huge market interruptions, the First Iraq War and Hurricane Katrina respectively. The latest release marks the third time that strategic reserves have been tapped, this time officially in response to loss of output from the Libyan civil war,” he said.
However, he added, such strategic oil releases only work if the market believes the interruption will be temporary, that supplies will quickly return to normal, and that stockpiles can be rebuilt later. “IEA member states’ strategic and industrial oil stockpiles total around 4,200 million barrels, in comparison the 60 million barrels released in July is small but nevertheless it does not provide a long term alternative to increasing oil production from major oil exporters,” he said.
“The IEA have made it clear that they hope the supply disruption caused by Libya will be brief, and that global oil markets will be back in balance by the later part of 2011. However, the IEA’s expectations are almost wholly dependent on Saudi Arabia increasing oil output to compensate for the 1.6 million barrels per day of lost Libyan production. While Saudi Arabia have said they will increase output from around 8.5 to 10 million barrels per day, which would almost exactly offset the loss from Libya, observed increases in output have been much slower than many had expected. Even several months after Libyan output has effectively ceased, incremental Saudi output has still not matched that lost from Libya,” he said.
Crude oil prices are already indicating that market participants remain nervous about supply shortages and that the IEA’s intervention may not be working. Brent crude prices may have fallen sharply on the initial news of the IEA’s plans but since then have rebounded and are near their highs of around $120 per barrel during the earlier part of this year when the Libyan crisis was unfolding and before the IEA or other oil suppliers had time to react. This may be a sign that markets are as tight now as they were before the IEA intervened.
“Only action by oil suppliers can provide a long term solution to the current oil market squeeze,” he said.
“The IEA intervention is only a stopgap measure, as the use of strategic oil reserves always will be. Failure to act on the part of oil producers ultimately risks irreversible harm to the oil industry if another oil price spike and global recession curs, the impact of the 2008 crisis on the oil industry bears this out,” Jafar added.
The only sustainable solution is for oil producers, especially those in the Middle East who have access to the greatest resources, to ensure that investment from both public and private sectors is maximised to ensure that world’s oil spare productive capacity is sufficient to ameliorate this problem.
“Now is not the time to be complacent. The oil market is currently in dysfunction and a refusal to recognise that could jeopardise the future of the industry. We believe that private sector firms, like Crescent Petroleum, can go a long way to helping restore the oil market’s stability but we need both public and private sectors to pull together to achieve this. With prompt action I believe that the credibility of the oil market can be restored and a healthy relationship between producers and consumers restored,” he added.