Though the release of 60 million barrels of oil from the US and other IEA member countries' strategic reserves in July -worth $7 billion at current prices - caught the world by surprise, the move saved consumer countries $110 billion, Badr Jafar, president of Crescent Petroleum, said Saturday in a statement. There is a strong economic logic for such releases, he noted. "Based on the oil price spikes of the 1970s and 2008, oil could easily head toward $200 per barrel in the event of a similar crisis today. That equates to an extra $110 billion in 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," Jafar said. 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, he pointed out. 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. "However, 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, Jafar 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. He noted though that "oil supplies appear to be responding slowly to a shock to the system while demand is proving resilient suggesting further market tightening", as global oil demand has continued its rapid rebound. Crude oil prices are already indicating that market participants remain nervous about supply shortages and that the IEA's intervention may not be working. This may be a sign that markets are as tight now as they were before the IEA intervened, he observed. "Only action by oil suppliers can provide a long-term solution to the current oil market squeeze." Jafar 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 occurs, 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 maximized to ensure that world's oil spare productive capacity is sufficient to ameliorate this problem, he pointed out. "Now is not the time to be complacent" Jafar said, noting that "the oil market is currently in dysfunction and a refusal to recognize that could jeopardize 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."
