There has been a lot of chatter over the past several days over what the International Energy Agency's move to release crude oil from strategic reserves will do to the price of crude oil. When the surprise move was announced on Thursday, oil prices retreated to four-month lows: Brent crude fell 6.1 per cent and West Texas Intermediate fell 4.6 per cent.
Some observers pointed out that the amount of oil to be released - 60 million barrels in the course of a month - is a mere drop relative to global consumption. But because oil is inelastic, a little tweaking on the supply end can have a big impact on the cost end. James Hamilton, an economics professor and blogger at Econbrowser, noted that the 60 million barrels may be enough to send the price of oil tumbling 23 per cent in the short term, at least theoretically.
But the actual move in oil is complicated by a number of other factors, including production increases by Saudi Arabia, potential stockpiling by China and ongoing concerns about the health of the global economy. And, of course, there is the longer-term picture to consider here: With energy consumption rising worldwide, can the IEA's meddling have any lasting impact on the price of crude?
Mr. Hamilton doubts it: "I would recommend against further [strategic petroleum reserve]sales, regardless of the final outcome of the current effort," he said.
"The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we're talking about an oil price above $100/barrel in the first place. A one-time release from the SPR, or even a series of releases until the SPR runs dry, does nothing whatever to address those basic challenges."