(EnergyAsia, July 29 2014, Tuesday) — The International Energy Agency (IEA) has valued the combined 30 years of oil stockpiles of its 29 member countries at more than US$3.5 trillion due mainly to their ability to limit the impact of supply disruptions on the world economy.
Up to end-March 2014, the IEA said its members held a total of 4.1 billion barrels, equivalent to about 44 days of total global demand to limit market volatility in the event of supply disruptions.
“Each barrel a country stores provides net global benefits averaging at least US$41 per year after storage costs,” said the IEA study that it said tested tens of thousands of possible market scenarios for their impacts from hypothetical oil supply disruptions on economies that held and did not hold emergency stockpiles.
The oil stockpiles must provide not only energy security but also save money, according to a study contained in the IEA’s recent publication, Energy Supply Security 2014.
As part of its membership rules, the IEA states that a net oil importer must hold emergency stocks equal to at least 90 days’ worth of its previous year’s imports. Members are committed to take joint measures to deal with oil supply emergencies to prevent or reduce economic damage to their countries. They have also agreed to share energy information, co-ordinate their energy policies and co-operate in the development of rational energy programmes.
Estimated US$3.5 trillion benefit from stockpiling is conservative, says IEA
The agency said the economic model used in its study estimated changes in oil price, net import costs and gross domestic product during probable disruptions and possible stock releases over a 30-year period.
“Most of the benefits it found stem from how the IEA stocks would offset supply losses during disruptions, significantly limiting increases in import costs and preventing damage to the world economy. A smaller benefit is the net revenue gain from the sale of stores during a disruption,” it said.
Calling its estimate “conservative”, the IEA said the study not only excluded supply disruptions for specific products, it also did not assess the stockpiles’ deterrent effect on global oil trading outside of a stock release.
Further, it considered only international benefits and left out emergency stores’ economic savings potential in domestic supply disruptions.
“The benefits from any use of emergency stockpiles to counter such situations depend largely on local context, such as where the supplies are located as well as the severity and duration of the situation,” it said.
The study concluded that the benefits of stockpiling exceed its cost which range from US$7 to US$10 per barrel per year.
Member countries can store crude and oil products in aboveground tanks or for about 30% more in underground caverns, said the IEA. The cost of the oil makes up at least half of the total stockpiling expenditure, while building and maintaining storage infrastructure account for about 20% of annual costs.
After counting expenses like land and refreshment of stocks, the IEA said the final stockpiling cost to consumers in many countries is less than US$0.01 per litre of fuel.
Responding to major supply disruptions
According to the IEA, members of the Organisation of Arab Petroleum Exporting Countries (OAPEC) stopped selling oil to both the US and the Netherlands in 1973 following their support for Israel in the Arab-Israeli War. South Africa, Rhodesia and Portugal were later added to the list of embargoed countries, resulting in a global oil crisis.
The ensuing shortage of oil and spiralling prices led countries to seriously examine their energy security defined as the uninterrupted availability of energy sources at an affordable price.
The IEA was established in November 1974 in response to this crisis to help countries to develop response measures, such as the establishment of emergency reserves, and to co-ordinate a collective response to any future major disruptions in oil supply.
The IEA has identified three main causes for oil supply disruption: unforeseen technical problems, the weather such as seasonal storms in the Gulf of Mexico, and civil unrest such as the civil war in Libya in 2011. Military or terrorist attacks which target energy infrastructure for political motives, or disputes between governments, while rare, are other significant concerns for world oil markets.