International Energy Agency and OPEC Watching Both Sides of the Fence in Tense Oil Market Conditions

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). Open communications and frank exchanges between the International Energy Agency (IEA) and OPEC at the World Petroleum conference in Rio last week and information made available by the IEA on oil stocks and emergency response potential bring a timely perspective for a nervous and potentially volatile global energy market. Knowing what can be done before it happens and having an inclusive emergency plan ready in case if it does happen allows for a greater degree of calmness in considering immediate options and their outcomes.

IEA member countries are holding nearly 4 billion barrels of public and industry oil stocks, which represent at least 114 days of net imports. IEA net oil importing companies have a legal obligation to hold emergency oil reserves equivalent to at least 90 days of net oil imports of the previous year. IEA net exporting countries, who do not have stockholding obligations, are at present: Canada, Denmark, Norway and the United Kingdom. Denmark and the United Kingdom do hold stocks under consumption based European Union (EU) regulations as do other EU member countries.

The 26 members of the IEA are: Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea, Luxembourg, The Netherlands, New Zealand, Norway (under a special agreement), Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States.

The EU also participates in the work of the IEA. Cooperation and experience sharing exists with other important oil producer and consumer countries including China and India and with other international organizations. Notably, Russia is not a member, although it is increasingly cooperating in the world market.

Russia will attend the OPEC meeting on September 19, where the organization will decide on future production levels. After making production cuts in response to OPEC requests earlier in the year pressure from Russian oil majors, keen to expand their market share at the expense of OPEC, caused the Kremlin to lift output restrictions in the third quarter. Russia has said that it could significantly increase crude production and exports in the fourth quarter of the year to meet international demand, including supplies to the U.S.A. The oil ministry in Moscow supports a fair price for oil at between $22 and $25 a barrel. Current prices in the $28/$30 range are said, by OPEC hardliner Venezuela, to contain a $4 dollar 'war premium' reflecting the risk of a U.S. attack on Iraq and its consequences.

A number of Caspian littoral oil states are also officially unaffiliated, as are the significant West African oil producers, Angola and Gabon, who were both visited by the US secretary of state Colin Powell in the past week.

The largest oil supply disruption occurred at the time of the 1978/79 Iranian revolution that resulted in a supply shortfall of around 5.6 mb/d over a period of six months. The August 1990 to January 1991 period of the developing Gulf crisis resulted in a shortfall of over 4 million bpd and the outbreak of the Iran-Iraq war October 1980 to January 1981 produced a 4 million bpd shortfall, which was similar to the Arab-Israeli war of October 1973 to March 1974. The appeal of options and alternatives to one region supply dominance is obvious from the history of the past fifty years.

In terms of industry related technical and operating problems the supply disruption caused by the April 1989 to June 1989 UK Cormorant platform disaster resulted in a shortfall of around 400,000 bpd and reaction to the Exxon Valdez incident, March/April 1989, hit supplies by about 300,000 bpd.

When Desert Storm hostilities broke out the IEA activated its contingency plan on 17-1-91 to make 2.5 million bpd of oil available to the market. Stockdraw was the largest component at 2.086 million bpd (83.4% of the total). Demand restraint accounted for 330,000 bpd (13.2%), surge production 17,000 bpd and fuel switching 67,000 bpd.

The maximum drawdown rate of IEA public oil stocks for the first month of emergency response is 12.9 million bpd, consisting 9.6 million bpd of crude oil and 3.3 million bpd stockdraw. IEA member countries hold around 1.28 billion barrels of public oil stocks. An IEA study in June this year shows that stockdraw potential is sufficient in magnitude and sustainability to cope with the largest historical supply disruption. The governing board determines whether coordinated action is required and draws on a global network of senior energy officials, international organizations and industry associations for industry emergencies.

Crude oil prices surged in August and total OECD countries oil stocks fell in July by 21 million barrels to 2.617 million barrels. Production fell in August with increased levels of production by OPEC failing to offset a 270,000 bpd drop in Iraqi output. Non-OPEC output fell by 370,000 bpd, pulled down by North Sea maintenance.

The IEA assessment of global oil demand in the third quarter has been raised by 220,000 bpd, due in part to strong U.S. gasoline demand. Global demand is now expected to rise seasonally by 1.6 million bpd from the third to the fourth quarter.

Coming out of Rio is the shared view between the IEA and OPEC that the world will rely predominantly on fossil fuels for the foreseeable future, while continuing to seek sustainable, long term alternatives. They also agree that OPEC's share of world oil supply will grow (currently claimed to be 40%). Both bodies are interested in the technology for capturing carbon during fossil fuel use (carbon sequestration) and its safe disposal deep on or offshore. They also agree together on the energy aims and responsibilities coming from the Johannesburg World Summit on Sustainable Development. The IEA notes that 95% of the expected increase in world population will be urban-based and urban electricity generation requires large-scale, centralized power generation.

OPEC and IEA are cooperating, with others, on the Joint Oil Data Exercise which is designed to bring greater transparency to oil markets by improving the quality of published data on oil demand, supply and stocks.

The 11 member countries of OPEC are: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, The United Arab Emirates and Venezuela.

Security of demand for producers depends critically on sustaining buyer confidence, which means maintaining security of supply. IEA would like to see the international oil market operating freely, unconstrained by politically driven production limitations. At Rio they have been willing to welcome the commitment of OPEC to continuity of supply and the organization}s disavowal of the use of oil as a political weapon.