World Leaders could tap strategic oil reserves if oil stays above $100
Oil reserves could be tapped if prices stay above $100 a barrel
Emergency oil reserves across the world could be tapped if prices remain above $100 a barrel over the next two months, according to Treasury sources.
By Philip Aldrick, Economics Editor
3:22PM BST 29 Aug 2012
World leaders have become increasingly concerned about the toll to economic growth dealt by the 20pc spike in oil prices over the past three months. In June, Brent crude was trading at about $90 a barrel but has since soared back above $110 – threatening another bout in inflation that could derail recovery hopes in the UK as well as elsewhere.
Rising oil prices have already begun to influence inflation expectations in the UK. A survey by YouGov and Citi found that the general public expects inflation in the year ahead to be 2.8pc, a sharp rise from 2.4pc in June and July. Citi said: “The rise in inflation expectations follows recent increases in petrol prices.”
Oil prices are expected to be discussed at the International Monetary Fund’s annual meeting in Tokyo in the second week of October. A decision on releasing reserves to boost supply and lower prices may be taken there or at the G20 summit in Mexico the following month.
The US, France and Italy are keen to see a release of oil reserves to bring down fuel prices and improve prospects for the global economy. Of the Group of Seven leading nations, the UK is also in favour of such a move but Canada, Germany and Japan are believed to have doubts.
Pressure could also be brought to bear on Saudi Arabia to increase production at the IMF meeting.
“The issue of oil markets is likely to feature in the international meetings in October,” a Treasury source said, adding that “people were happy when prices were below $100 a barrel”.
President Barack Obama is said to be highly sensitive about the recent oil price rises with the November election looming. Analysts have blamed the spike in part on the Iran sanctions brought in earlier this year by the Obama administration, a move referenced in Tuesday’s G7 statement which said the “current rise in oil prices reflects geopolitical concerns and certain supply disruptions”.
The issue was sufficiently important for the Chancellor to break off his holiday in the US to address the concerns.
World leaders hope in the first instance to persuade Saudi Arabia to increase production and, if no agreement is reached, to seek IEA approval. Saudi Arabia has already raised production to compensate for the loss of Iranian supplies, but analysts say it has not moved fast enough.
Hurricane Isaac also helped focus minds by shutting down oil production in the Gulf of Mexico, costing an estimated 936,000 barrels per day – or 12pc of refining capacity in the Gulf Coast. The Gulf accounts for almost a quarter of US oil production.
The US is thought to be keen to tap its substantial reserves but needs clearance from he International Energy Agency (IEA), which represents 28 oil consuming nations and is currently opposed to any stock release, arguing the market is well supplied.
The last time strategic oil reserves were released was in June 2011 during the Arab Spring, in response to the disruption to supplies from Libya. The UK has 67.5 days of oil stocks that it could release as part of a coordinated effort to flood the market and reduce prices.
The G7 statement hinted at the likely direction of policy, saying: “We encourage oil-producing countries to increase their output to meet demand, while drawing prudently on excess capacity, and welcome Saudi Arabia’s commitment in [Mexico earlier this year] to mobilize existing spare capacity to ensure adequate supply. We stand ready to call upon the IEA to take appropriate action.”
Olivier Jakob, an analyst at Petromatrix, said: “The G7 communique is an implicit recognition of the total failure of Saudi Arabia to control supply and prices while the West imposes sanctions on Iran. For lack of production or for lack of political will, Saudi Arabia has simply not performed on its commitment to the G20 and as a result the politicians in the West are starting to panic as prices at the pump reach record highs.”
“Given that Saudi Arabia is not responding, if the US does not want the sanctions against Iran to break down then it is left with no other option than to release” strategic reserves, he added.