On March 1, the International Energy Agency announced the release of 60 million barrels of emergency oil stocks held by its members in response to Russia’s invasion of Ukraine. The IEA’s executive director, Fatih Birol, said, in announcing the stock release following a ministerial meeting of IEA members, that this was an initial response and further stock releases may follow if warranted. At the time of the announcement, the IEA said its members held 1.5 billion barrels in public reserves and 575 million barrels under obligations with industry, what is known as commercial stocks.
An IEA stock release is a rare event; this release is only the fourth in the IEA’s 48-year history. The first was at the end of 1991 just before the first Gulf War, the second in 2005 in response to the disruption from Hurricane Katrina, and the third in 2011 due to the conflict in Libya. The IEA does not have any oil stocks itself and instead coordinates the release of emergency stocks held by its member governments. The IEA Secretariat advises on the timing and scale of any such release, but the decision to draw from inventories needs the unanimous agreement of the IEA’s Governing Board.
The scale of the latest release is comparable to the earlier releases although, with more member countries and strong determination to do more than the minimum, this will be the largest release. The 31 members of the IEA, all of which are also OECD members, are obliged to hold 90 days of net imports in stocks ready for release in a collective response to a supply disruption.
The stocks are held by the individual IEA member countries in a variety of models: government-owned strategic reserves, notably the United States’ Strategic Petroleum Reserve; agencies coordinating emergency oil holdings, for example, EBV in Germany and COVA in the Netherlands; and industry stocks – suppliers to the market are obligated to hold stocks in proportion to the volume supplied – which is done in the United Kingdom. The member countries decide whether to hold the emergency stocks as crude oil or petroleum products, dependent on what suits their domestic energy systems.
How the emergency stocks are released and at what price depends on the stockholding model. The U.S. Strategic Petroleum Reserve and other agencies usually auction the volumes, but they can also offer swap or loan agreements. Stocks are released from industry models by lowering the stockholding requirements on the obligated suppliers, for example, reducing all suppliers’ obligations by a fixed proportion (e.g., from 90 days’ worth of supplies to 85 days’ worth). The emergency stocks are thereby made available to the market to increase liquidity.
The IEA monitors the oil release with members providing additional oil data and more frequent detail on stock levels, production, and demand with the required reporting revised depending on the nature of the disruption. The additional information helps the IEA assess: how the market is evolving; what impact the emergency stocks might be having; and if a further stock release might be necessary or if the collective action should be terminated. Again, the IEA Governing Board makes the decisions on further stock releases and the termination of the collective action. After a stock release has been completed, the IEA Secretariat advises its members on how fast they should replenish their emergency stocks, usually over six months to a year depending on market conditions.
The IEA was established in 1974 after the Arab-led oil embargo to help the OECD countries better coordinate their energy security and advise on developing their energy policies. At the time, OPEC had a dominant share of the oil market with few alternative supplies from other oil-producing regions to Middle Eastern oil during the 1973 embargo. But this proved to be a double-edged sword as the resultant spike in oil prices from the embargo encouraged the development of resources elsewhere (for example in the North Sea) that were not previously economically viable when prices were lower. This also proved true with U.S. shale production that took off in 2008 after oil prices rose to record levels and has led to the United States overtaking Saudi Arabia and Russia as the world’s largest oil producer. As the 13 members of OPEC lost market share to the United States, they invited Russia and nine other non-OPEC producers to join them as the OPEC+ alliance of 23 producers with control over more than half of global oil supplies.
In contrast to the 1973 embargo that was a collective effort by oil producers to reduce supplies, the current situation has been prompted by consumers. The IEA’s stock release was launched before sanctions specifically targeted Russia’s energy sector and a week before Washington and London announced a ban on Russian oil and gas imports March 8. The stock release was preemptive in anticipation of significant disruptions to Russian oil exports with buyers halting trades either by self-sanctioning or because banking, financial, and shipping sanctions are making dealings with Russia more difficult and riskier. Specialist publication Energy Intelligence reported March 9 that Russian oil exports had fallen by one-third to 2.5 million barrels per day.
Even before Russia’s invasion of Ukraine, the market was tight with fears of supply disruption, stemming from several OPEC and non-OPEC producers within OPEC+ struggling to produce at higher levels due to insufficient investment in new capacity during previous oil price downturns, and oil prices rising with post-pandemic demand recovering faster than supply. Prices were trading above $100 per barrel at the time of the IEA’s stock release announcement, and the announcement did little to pacify the market since the 60 million barrels represent less than a day’s worth of supply.
Furthermore, there seems to be increasing recognition of the need to coordinate short-term measures with longer-term solutions. This was particularly noticeable with the IEA’s stock release announcement being packaged together with a plan for Europe to reduce its reliance on Russian gas. It published a 10-point plan on March 3 on how Europe could reduce reliance on Russian gas supplies with another 10-point plan to cut oil use expected shortly. These recommendations are likely to have long-term impacts on demand and on longer-term goals to decarbonize energy systems more rapidly. This is in line with the IEA’s efforts to diversify energy sources for power generation in the 1970s but is not something that accompanied previous stock releases.
The IEA, in a follow-up to the release announcement, said March 9 that contributions to the collective stock draw amounted to 61,170 million barrels, making it “the largest stock release in IEA history.” While taking unprecedented action, the IEA, as has usually been the case with such releases, is having to respond to a massive supply shock and guarantee security of supply in emergencies. Given the scope of the current crisis, it will have to rely on the psychological effect of coordinated action and the impact of cumulative steps in the coming months to help ensure the tools it has to address the crisis will be effective.