In a rare move, finance ministers in the G7 group of advanced economies has called on oil producing countries to hike their output in their interests of the world economy.
In a communiqué agreed late yesterday, ministers said they were “monitoring the situation in oil markets closely” and “stand ready” to ask the International Energy Agency - the OECD’s lobbying group for oil consumers – “to ensure the market is fully and timely supplied.”
The move is more evidence that the US and other advanced economies will work to coordinate a release from the IEA’s strategic petroleum reserve (SPR) as oil prices have crept back to levels which many economists believe is damaging to economic growth.
A report in Petroleum Economist suggests a release may take place as early as September, with the US wanting to press ahead with a release from its 695 million barrel stockpile but persuaded to refrain from making a unilateral move that could damage the IEA’s credibility.
The Brent crude benchmark fell to around $90 recently on poor economic indicators out of advanced and emerging oil consumers and a wall of oil from Saudi Arabia, other Gulf producers and Iraq.
Since then fears over a unilateral Israeli attack on Iran and more recently the Isaac tropical storm in the Gulf of Mexico – which has seen US producers shut in around 1.3 million bpd of production – have raised fears of tightened supplies and sparked new concerns about the level of oil inventories.
“The current rise in oil prices reflects geopolitical concerns and certain supply disruptions,” said the G7 communiqué. “We encourage oil producing countries to increase their output to meet demand, while drawing prudently on excess capacity.”
Saudi Arabia, arguably the real SPR for advanced economies – has already responded to fears over oil prices by increasing its production to a little above 10 million barrels a day, as part of the Kingdom’s long-standing policy of promoting lower oil prices than some of its fellow OPEC members as a means of ensuring long-run demand.
The communique comes despite IEA data suggesting OPEC producers are already pouring more oil onto markets than is needed. According to data included in the International Energy Agency’s latest Oil Market Report, OPEC producers pumped 31.9 million barrels a day last month, 2.1 million barrels more than the call on OPEC crude for the same period.
A release from the SPR would play well politically for US President Barack Obama, who will stand for re-election in November against Mitt Romney, whose platform includes energy policy that accords with the wishes of the oil industry and a strident criticism of Obama’s economic record.
However, a release from the SPR – assume the reserve is actually drawn down by buyers – would leave consumer countries ill prepared in the event of an oil shock resulting from any strike on Iran. SPR releases may also be subject to diminishing returns: the previous release did little to halt an upward trend in oil prices.
