A gas flame burns behind oil field workers in Sakhir, Bahrain.Hasan Jamali/The Associated Press
Major industrialized countries are acting to tame volatile oil prices by releasing emergency crude supplies as North America and Europe head into the key high-demand summer season.
The move Thursday by the Paris-based International Energy Agency and the U.S. government is aimed at reducing the drag on the global economy caused by high oil prices and is a response to a growing divide within OPEC. In a bid to push up oil prices, Iran and Venezuela two weeks ago rejected pleas for higher production from the cartel to help offset the loss of crude caused by the civil war in oil-rich Libya.
The IEA, which co-ordinates energy policy among industrialized nations, and the Obama administration jointly announced the decision to sell 60 million barrels into the market over the next month - an average of two million barrels per day. Half of that will come from the U.S.'s strategic petroleum reserves, which serves to deal with any sudden loss of crude supplies.
"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," U.S. Energy Secretary Steven Chu said.
Traders responded immediately by driving down global crude prices.
In futures markets Thursday, North Sea Brent - which has become the benchmark for international crudes and North American pump prices - fell $5.87 (U.S.) to $107.87 a barrel, while West Texas Intermediate , which sets the pace for Canadian crude prices, lost $3.69 to $91.72. Both recovered from even steeper losses during the day's trading.
Many economists, however, suggest the impact may be short-lived, especially if Saudi Arabia and other members of the Organization of Petroleum Exporting Countries respond by foregoing planned production increases.
"There is no emergency situation around the world in terms of oil supplies," said Patricia Mohr, a commodity market economist at Bank of Nova Scotia.
"Saudi Arabia was already pumping up its oil [production]to make more supplies available. Now it's not clear what they'll do because this move pre-empts them in a way."
Ms. Mohr said the release of strategic reserves was clearly aimed at dampening oil prices to ease the global economic slowdown linked to higher crude costs. It will hurt oil producing provinces in Western Canada and Newfoundland and Labrador, but provide relief to consuming provinces like Ontario and Quebec.
Natural Resources Canada said Ottawa was consulted as a member of the IEA and supports the decision. But because Canada is an exporting country, it is not required to keep strategic reserves and therefore will not participate in the current sale.
The U.S. officials said the Department of Energy will auction off some 30 million barrels of light sweet crude that is stored in caverns in the southern states to buyers who must take delivery within 13 days.
Under a law aimed at helping ensure U.S. oil remains available domestically, the U.S. crude cannot be exported to European refineries that relied on light, sweet Libyan crude for their supplies. The additional American supply will, however, mean U.S. refiners will be competing less with European and Asia buyers for top grade product.
White House officials insist the Obama administration is not looking to manipulate prices, but instead wanted to ensure the tight crude market doesn't derail the global economy.
In a conference call with reporters, administration officials said the decision was made "in full consultation" with producing countries like Saudi Arabia, though they would not say whether the Saudis agreed with it.
The Saudis have been increasing production since the loss of Libyan supplies, and had unsuccessfully urged OPEC to boost its formal production target at its June meeting in Vienna.
The Saudis and other Gulf producers promised to boost oil production by an additional 1.5 million barrels a day to feed rising consumption from emerging countries in the second half of the year.
Much of the additional Saudi supply is a heavier, more sulphurous grade of crude that many refineries cannot process. And officials of the kingdom have said they would only increase production if they had buyers for their crude, and were not interested in seeing it go into storage.
Michael Lynch, president of Strategic Energy & Economic Research, said the release of oil will provide a psychological impact on oil market traders who were already facing concerns about a weakening global economy and slower-than-anticipated growth in crude demand.
"I suspect that, at least in the U.S., there will not be a lot of buyers for the oil; in Europe, possibly there will be more because they're more reliant on Libyan oil," Mr. Lynch said.
"But it hit the market combined with some pretty weak economic news, and that encouraged the selloff."
The U.S. oil industry reacted angrily to the news, saying the Obama administration is looking to drive down prices artificially, rather than pursue policies that would increase production.
"Markets are now very well supplied. Supply in the United States is particularly high right now and gasoline prices have been falling for weeks," the American Petroleum Institute said in a statement.
Average pump prices in the U.S. have fallen to about $3.60 a gallon from the peak of about $4 earlier this spring. In Canada, the average price for regular gasoline was $1.266 (Canadian) per litre this week, compared with $1.357 in early May. This time last year, the average price was 99.9 cents per litre.
But there are some key factors that will determine whether the lower prices endure, including how OPEC reacts, whether the IEA and the U.S. are prepared to release more crude after the initial 30-day period expires in July, and whether the global economy rebounds from recent weakness.
Morgan Stanley economist Hussein Allidina said he continues to expect prices to climb through the second half of 2011 and into 2012, as demand growth from emerging markets outpace the ability of producers to increase supply.