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Why Is the IEA Tapping Strategic Reserves?

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Just why did the United States and the International Energy Agency decide to release 60 million barrels of oil next month from their strategic petroleum reserves?

The IEA cites the loss of 1.5 million barrels of Libyan production but that's been going on since February. So why has it taken until July for them to respond?

Some will see the IEA's move as a much needed slap in the face to OPEC price hawks such as Iran and Venezuela, which stymied a recent agreement to raise production quotas. But when have production quotas ever stopped OPEC producers from pumping more oil when they were so inclined?

Perhaps it is a vote of non-confidence in Saudi Arabia's ability to ramp up production to its new 10 million barrel per day target. But who in the IEA really believes Saudi Arabia could sustain that level anyway? It hasn't happened since the early 1970s. As I pointed out several weeks ago, the only country capable of producing oil at that rate is Russia, and it's already doing it.

Still others will point to the use of the strategic reserves as nothing less than a macroeconomic stimulus measure akin to a tax cut, conveniently timed for an upcoming U.S. presidential campaign.

With the U.S. Federal Reserve Board's quantitative easing and Washington's fiscal stimulus winding down, will timely releases from strategic oil reserves become the new kid on the block in the Obama administration's economic tool kit? But Washington may soon discover strategic oil reserves are a very dangerous instrument to use. It's a lot easier to print money than it is to pump oil from the ground.

Other than the level of oil prices and the resulting weakness in oil consuming economies, what supply shock does the release redress?

There is no doubt the loss of Libyan production has made world oil markets even tighter but triple-digit world oil prices aren't really about supply shocks. They're about the growing imbalance between ever-surging world oil demand and little-growing world oil supply. And that imbalance is becoming bigger all the time.

While global inventories can still bridge the gap in the very near-term, they are hardly a sustainable solution. Even the U.S. Strategic Petroleum Reserve amounts to less than 40 days supply day for the U.S.'s 19 million barrel a day oil habit.

If inventories aren't going to be depleted, tapping reserves today means restocking them tomorrow. When exactly does the IEA expect to take back into inventory to rebuild the 60 million barrels that they are now adding to the market? What's going to change in the world demand-supply balance that will allow inventories be rebuilt without stoking the price pressures that tapping reserves are supposed to relieve.

The only plausible time for restocking to happen is during the onset of another oil -induced global recession, which, of course, the IEA may think will occur sooner than most of us yet suspect.

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