Does the coordinated release of strategic petroleum reserves by the International Energy Agency have any effect?

(Source: China Electricity News)

Reprinted from: China Electricity News

The International Energy Agency recently announced that 32 member countries have unanimously agreed to release 400 million barrels of strategic oil reserves, which have now begun to be supplied to the market. Market reactions show that after the IEA announced the largest-ever release of reserves in history, international oil prices initially fell, but then surged again and approached recent highs, indicating that releasing reserves has limited effect in stabilizing oil prices. Why did this happen? Does releasing reserves actually work? If the effect is limited, why release reserves at all?

Can releasing reserves fill supply gaps?

“Releasing reserves can buy time but cannot solve the crisis,” said a report from Bernstein, an American investment firm. The coordinated release of oil reserves by the IEA “cannot fill the supply gap caused by disruptions,” and has limited impact on oil price trends.

What if passage through the Strait of Hormuz is blocked? How much oil would the world lack? Data from the IEA and other agencies show that a blockade could reduce global daily supply by 20 million barrels of crude oil and related products. Even if some crude can be transported via pipelines through Saudi Arabia and the UAE, limited pipeline capacity and the maximum throughput of Red Sea ports mean there would still be a shortfall of over 10 million barrels of crude and related products daily.

The IEA member countries agreed to release 400 million barrels of oil reserves, which on paper could compensate for days of supply disruption caused by a blockage of the Strait of Hormuz. But in reality, releasing oil reserves involves many factors.

Jason Bordoff, founding director of Columbia University’s Center on Global Energy Policy, said that releasing reserves is far more complex than it appears. For example, many US reserves are stored in underground salt caverns in the Gulf of Mexico, and extraction is limited by technical capabilities. Additionally, most Middle Eastern crude oil is shipped to Asian countries, and reserves released elsewhere would need idle transportation capacity to reach Asian markets.

Samantha Gross, an energy expert at the Brookings Institution, analyzed that the IEA’s strategic petroleum reserve might be released evenly over two months, amounting to about 7% of global demand, while the actual impact of a blockade on shipping could be 15% to 17% of global demand. “This release sends a positive signal, but it cannot fill the market gap.”

Historical effectiveness of reserve releases

Reuters analyzed the release of reserves by IEA member countries, comparing it to “sticking a Band-Aid on a wound.” Short-term patching might be effective, but it cannot solve the underlying problem.

Experience shows that releasing energy reserves can be effective in the short term, but almost only as a “temporary painkiller,” easing market panic initially but not replacing sustained supply. “Every time it helps, but never enough.”

During the Gulf War in the 1990s, about 4 million barrels of oil per day were disrupted, and the IEA coordinated releases from the US and other countries. Analysts say that while oil prices fell quickly after the release, the real reason was increased production from Saudi Arabia and other countries, not just the reserves.

In 2005, after Hurricane Katrina, 1 to 1.5 million barrels per day of US oil production was disrupted. Reserve releases helped temporarily stabilize prices but could not address fundamental infrastructure damage, serving only as a “short-term transition.”

During the 2011 Libyan war, about 1.6 million barrels per day of exports were interrupted. After releasing reserves, prices temporarily fell but then rose again. The market realized Libya’s exports would not recover easily, and other producers could not significantly increase output, so reserves could not solve long-term issues.

In 2022, amid the escalation of the Ukraine crisis, over 5 million barrels per day of Russian exports were halted. The IEA coordinated the release of about 240 million barrels. However, similar to Libya, large-scale reserve releases could not address long-term supply shortages. Moreover, this release excessively depleted Western countries’ oil reserves, which have not fully recovered to this day.

Why release reserves if the effect is limited?

If the effect is limited, why release reserves at all? Some analysts say that the real purpose of releasing reserves is not about “supply,” but about “expectations.” Currently, the main role of reserve releases is to “buy time.” By releasing reserves, the US and others can create more room for diplomatic and military maneuvers in the short term, easing political pressure on governments.

Many Western strategic analyses see the role of strategic petroleum reserves as “managing expectations,” making markets believe “governments can intervene in supply,” which is essentially a “psychological stabilizer.” In the short term, reserve releases can also help ease the surge in gasoline and other commodity prices, soothe voter sentiments, and respond to domestic political concerns.

Additionally, releasing reserves sends an international signal that the US-led alliance still has coordination capacity. This can help stabilize allies’ confidence and mend fractures in the Western alliance caused by US-Israeli actions against Iran.

However, reserve releases are never a fundamental solution to the oil supply crisis. The IEA states that the only long-term solution is to restore passage through the Strait of Hormuz. Reserve releases cannot fill supply gaps or stabilize energy markets over the long term. In other words, having reserves does not mean the global energy market is “worry-free.” The real priority is to achieve a ceasefire and restore normal order as soon as possible.

Editor: Jiang Pengxin