November 2, 2007
France releases oil from its reserves
There was a flurry of excitement in the oil market this afternoon when it appeared that France had decided to release oil from its strategic reserve. The truth was less dramatic: the government was actually releasing 285,000 tonnes - about 2m barrels - of diesel and heating oil to offset problems at two refineries, and the oil was not coming from its strategic petroleum reserve.
All the same, the story raised the question of whether, given all the talk about whether today’s oil price is a speculative bubble, US and other governments should release enough oil from their reserves to give the speculators a bloody nose. If they succeed, they can replenish their stockpiles at much lower prices.
The history of currency interventions suggests they are most successful when markets have got far out of line with fundamentals, and intervention acts as a slap in the face to bring the market back to reality. Daniel Yergin of Cambridge Energy Research Associates argues that oil prices are becoming "decoupled from the fundamentals of supply and demand." If he is right, then an intervention in the oil market just might work.
It would, admittedly, be a gamble. When all the commercial players seem to want to be long of oil, it would be a brave energy minister who decided to go short. Much better to get Opec to do the job for them.
Steve Levine writes about a mock crisis exercise conducted in a hotel basement in Washington, DC yesterday. It focused on one factor that could send oil prices to $160:
Posted by: Eric | November 2nd, 2007 at 4:01 pm | Report this commenthttp://oilandglory.com/2007/11/oil-shockwave-and-caspian.html
The weak dollar is making oil more and more valuable…current world oil production is running around 85 million barrels a day while demand is hovering around 88 million barrels a day…yes there will be pullbacks, even sizeable pullbacks…but savvy players are raking it in in energy and will likely continue to do so………pk live oil price and chart at www.OilGasFutures.com
Posted by: Patrick Kerr | November 2nd, 2007 at 7:19 pm | Report this commentAll this talk of deflating artificially high oil prices with sales by the French government sounds very interventionist and is disappointing coming from a paper like the FT. If prices were really out of kilter with underlying supply and demand fundamentals then large multi-nationals would surely be locking them in by forward hedging their production and the selling pressure would naturally drive them lower.
Rather than gleefully hoping for the French to intervene and distort yet another market “by giving the speculators a bloody nose”, the flipside of the current price levels is that they make alternative energy sources more attractive, fueling investment and research into this vital area.
Posted by: Stephan Bisse | November 3rd, 2007 at 6:47 am | Report this commentThanks for the comments. Stephan: you are dead right about the importance of a high oil price for stimulating investment into alternatives. The idea of strategic intervention in the oil market was more of a modest proposal than a serious suggestion. I think there is actually more mileage in the reverse strategy: buying oil to support the price, to prevent it falling so low as to make alternatives uneconomic.
Posted by: Ed Crooks | November 5th, 2007 at 1:07 pm | Report this commentAny ideas on how to get the money raised from high oil (and oil company stock) prices out of the hands of speculators and into the hands of investors/researchers into alternative energies?
Oil prices have always been decoupled from supply - there is a finite supply that took hundreds of millions of years to build. The price has never reflected this.
Posted by: dave | November 7th, 2007 at 12:56 pm | Report this comment