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IEA is releasing Emergency Stock to ease Oil Price Shock

  • Published
    2nd Mar, 2022
Context

The International Energy Agency has agreed to release a total of 60 million barrels of oil in a coordinated effort in response to Russia's invasion of Ukraine.

About

About Emergency Stockpiles:

  • IEA members hold emergency stockpiles of 1.5 billion barrels.
  • The announcement of an initial release of 60 million barrels, or 4% of those stockpiles, is equivalent to 2 million barrels a day for 30 days.

Need of releasing emergency stock:

  • Brent, the global benchmark for two thirds of the world's oil, was 8.75 per cent higher at $106.54 per barrel.
  • West Texas Intermediate, the gauge that tracks US crude, was up 9.66 per cent, trading at $104.97 a barrel.
  • Russia plays an outsized role on global energy markets.
  • It is the world’s third largest oil producer and the largest exporter.
  • Its exports of about 5 million barrels a day of crude oil represent roughly 12% of global trade – and its approximately 2.85 million barrels a day of petroleum products represent around 15% of global refined product trade.
  • Around 60% of Russia’s oil exports go to Europe and another 20% to China.
  • Russia is also the second-largest producer of natural gas in the world.
  • In 2020, the country produced about 10.2 million bpd of crude oil and natural gas condensate, placing it second after the US, with Saudi Arabia in third place, according to the 2021 BP Statistical Review of World Energy.

About Benchmark Crude Oil:

    • Benchmark crude oil is the petroleum that serves as a pricing reference for other types of oil and oil-based securities.
    • The benchmark or crude oil markers make it easier for traders, investors, analysts, and others to determine the prices of multiple grades of crude oil varieties and blends.
    • The three primary benchmarks are:
      • Brent Crude
        • Roughly two-thirds of all crude contracts around the world reference Brent Crude, making it the most widely used marker of all. 
        • These days, “Brent” actually refers to oil from four different fields in the North Sea: Brent, Forties, Oseberg, and Ekofisk.
          • Crude from this region is light and sweet, making them ideal for the refining of diesel fuel, gasoline, and other high-demand products.
      • West Texas Intermediate (WTI): WTI refers to oil extracted from wells in the U.S. and sent via pipeline to Cushing, Oklahoma. 
      • Dubai/Oman
        • This Middle Eastern crude is a useful reference for oil of a slightly lower grade than WTI or Brent.
        • A “basket” product consisting of crude from Dubai, Oman or Abu Dhabi, it’s somewhat heavier and has higher sulfur content, putting it in the “sour” category.

 What is the role of the IEA in the event of a serious disruption to oil supply?

  • Since the IEA’s founding in 1974, a key aspect of its work has been to help coordinate a collective response to major disruptions in the supply of oil.
  • The collective response system is designed to mitigate the negative economic effects of a sudden oil supply crisis by providing additional oil to the global market on a short-term basis.
  • The IEA emergency response system is not a tool for price intervention or long-term supply management, both of which are more effectively addressed through other measures.

Where does the additional oil supply come from?

  • In the event of a severe oil supply disruption, IEA members can decide to release emergency oil stocks to the market as part of a collective action.
  • Once the need for an IEA collective action has been agreed, each member country’s contribution is proportionate to its share of total oil consumption among IEA member countries.

When has IEA collective action taken place previously?

Since the creation of the IEA, there have been three coordinated stock releases:

  • In the build up to the Gulf War in 1991
  • after Hurricanes Katrina and Rita damaged offshore oil rigs, pipelines and refineries in the Gulf of Mexico in 2005
  • In response to the prolonged disruption of oil supply caused by the Libyan Civil War in 2011

About the International Energy Agency

  • The International Energy Agency is an autonomous Intergovernmental Organisation.
  • The IEA was established in1974 by developed countries - under the auspices of the Organization for Economic Co-operation and Development (OECD) - in response to the oil embargo.
  • Headquarter: Paris, France
  • IEAis made up of 31 member countries and eight associate nations. Four countries are seeking accession to full membership - Chile, Colombia, Israel and Lithuania.
    • India is among the Eight Association Countries of IEA, along with China, Brazil and South Africa.
    • India became Associate member of IEA in March 2017but it was in engagement with IEA long before its association with the organization.

Roles and responsibilities

  • It was founded in the wake of the 1973-1974 oil crisesto help its members respond to the massive disruption of the oil supply, a role that continues to be fulfilled today.
  • The IEA mandate has expanded over time to include monitoring and analysing global energy trends, promoting sound energy policy, and promoting international technology cooperation.

What if India becomes its member?

  • Countries that want to become members of the IEA must also be members of the OECD and hold 90 days of oil importation as commercial stocks.
    • The proposal, if approved, will require India to increase oil shares within 90 days.
      • Current strategic oil reserves equal to 9.5 days of its need.
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