They pulled the trigger. Was it a bang? Or a Pop? More importantly, will the projectile of a joint release from the IEA members' strategic petroleum reserves prove to be a ricochet that produces a self-inflicted wound?
Much of the immediate commentary in the business press since yesterday's announcement has been superficial and unenlightening.
First, let's set the context:
1. A 60 million bbl joint release (of which the US contributes 30mm) against a daily production of 88 million barrels is symbolic and unsustainable in impacting market fundamentals.
2. Lead times in moving the release through the production and distribution pipelines means that the real economic impact will not be immediate, although yesterday's news was on the financial markets.
3. It was revealed that the Obama administration has been reviewing this option since April, so it was not precipitous.
4. It is a joint international response by the IEA community; not a unilateral US move.
5. At the time of the announcement, the Saudis, not OPEC, stated that they did not see the announcement as threatening to their position.
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So, to what effect is this done?
The most absurd suggestion is that it was intended to spare the recovery. Obviously, a non-sustainable initiative will have no sustainable positive effect on the economy.
The next most absurd suggestion is that it was done to curry positive political favor among consumers, particularly in the US. If so, see previous comment, and add irrelevant timing to intended result.
A more substantive but tenuous premise is that it is intended to send a message to speculators. It is tenuous in that it is only effective to the extent that it can be repeated. It is substantive to the extent that it adds a degree of risk to the speculative market as a deterrent, though a weak one.
A symbolic result is that it demonstrates the IEA cohort's capacity to take action in the market and not merely be spectators to OPEC's game. And here's where it gets interesting and dangerous.
Little discussed in this context, but relevant, was a report that appeared the previous day regarding Saudi Arabia's intent to use economic measures to contain Iran. This, combined with Saudi Arabia's statement the next day that the IEA's announcement does not 'threaten' its position needs further context.
In 2010, November, when US gasoline prices were rising somewhat unexpectedly, Saudi Arabia murmured that it had capacity to manage the market, but was not put to the test. In winter 2011 during the Arab awakening, KSA again assured the world of its capacity to intervene, 'if needed'. When Libya blew, ditto. It is recognized as a historical fact that KSA did not fill the gap, and widely speculated that it cannot. Then on March 29th Saudi Arabia put out a call to oil companies to expand its rig count by 28%.
Earlier this month, the tenuous discipline of OPEC broke down, showing Saudi Arabia's weakness as an enforcer.
Finally, coincidentally with yesterday's IEA announcement, the Wall Street Journal reported that Saudi Arabia's growing thirst for its own oil is causing it to look to nuclear to augment its energy profile. Doesn't sound like a lot of spare capacity to me for the rest of the world.
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So what does all of this suggest?
The move had a two pronged intent of:
- sending a message to market speculators that there is a new wild card in the market dynamics; and
- supporting Saudi Arabia in its neighborhood, however symbolically.
But one has to ask where this effort goes from here. While it might serve to make gun-slinger speculators look over their shoulders, it won't stop the inexorable rise of oil in the intermediate to long term if the economy continues to recover, however slowly. What was released from the reserve will have to be replace, because it will be needed for its intended purpose.
Political and energy industry opportunists posture that the limited impact of the Reserve release could just as easily be achieved by expansion of drilling. This conveniently ignores that the drilling response will not deliver to the marketplace for four to eight years. While the energy/political complex bashes the US administration for the 'lack of an energy policy', which is significantly the result of its leased representatives in Congress, it does not address the question of whether it has developed a credible response to the Gulf spill and the growing concerns about fracking going forward.
What will ultimately come out of this exercise is likely to be affirmation that Peak Oil has in fact arrived. We are running out of quick fixes. We can drill more, but it will at best sustain current supply levels against growing demand. It will not appreciably grow supply over the intermediate and long term, and therefore will not relieve prices, and therefore will be an ongoing constraint on the economy until the economy evolves from its dependency, which itself will not occur over night.
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A street cop who I once knew offered a piece of street wisdom that might be useful to Saudi Arabia, the IEA, and the US: "Never make a threat you can't back up. The only thing you'll prove is your weakness."
I could be wrong, but it seems to me that the Saudis are blowing smoke and shooting blanks, as is the IEA, as is the US.
Plan B, anyone?
Onward.
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