Sunday, April 15, 2012

The Emergency Response Mechanism under the International Energy Program



High crude oil prices are currently in discussion in the financial press, especially with regards to the possible introduction of EU sanctions on Iran.

As can be seen in the below charts, crude oil prices, as measured by the WTI Crude Oil Index and the OPEC Basket, are on high levels these days.






On April 3, 2012, the Financial Times reported that „Talks between some of the world’s richest oil consuming nations over whether to release billions of barrels in emergency oil reserves are moving to a question of “when” rather than “if” to act.” In this article, I would like to discuss how the emergency mechanism under the auspices of the International Energy Agency work.

The Participating Countries in the International Energy Program are Austria, Belgium, Canada, Denmark, Germany, Ireland, Italy, Japan, Luxembourg, Netherlands, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States of America.

The goals of the International Energy Program are

  • to promote secure oil supplies on reasonable and equitable terms;
  • to take common effective measures to meet oil supply emergencies;
  • to promote co-operative relations with oil producing countries and with other oil consuming countries;
  • to establish a comprehensive international information system and a permanent framework for consultation with oil companies;
  • to reduce the Participating Countries' dependence on imported oil.

The program consists of 5 main building blocks:

  • Emergency reserve commitment: Each Participating Country commits to keep emergency oil reserves that correspond to 90 days of its net oil imports.
  • Emergency measures in the forms of a demand restraint to reduce the Participating Countries' rate of final consumption or in the form of an allocation right / obligation of oil, depending on the Participating Country's domestic production, net imports, and supply right.
  • Information system: The General Section strives to monitor the situation in the international oil market and the activities of oil companies, the Special Section wants to ensure the efficient operation of the emergency reserve commitment and the emergency measures.
  • Permanent framework for consultation with oil companies
  • Long-term cooperation among the Participating Countries to reduce their dependence on imported oil

Today's discussion in the financial press relates to the second building block. The International Energy Program contains in its Chapter IV very detailed rules that describe the decision-making process leading to such emergency measures. In summary, this decision-making process looks like this:





The IEA emergency response mechanism consists of 3 levels:

1st level

If the daily rate of oil supplies in the Participating Countries reduces by at least 7 % of their average daily consumption, each Participating Country might be asked to implement demand restraint measures to reduce its final consumption by at least 7 %; such demand restraint measures may be replaced by using excess emergency reserves. In addition, excess oil supply capacities might the allocated among the Participating Countries.

2nd level

If the daily rate of oil supplies in the Participating Countries reduces by at least 12 % of their average daily consumption, each Participating Country might be asked to implement demand restraint measures to reduce its final consumption by at least 10 %; such demand restraint measures may be replaced by using excess emergency reserves. In addition, excess oil supply capacities might the allocated among the Participating Countries.

3rd level

If cumulative daily emergency reserve draw down obligations have reached 50 % of emergency reserve commitments, the Governing Board may decide on the necessary measures, namely an increase in the level of mandatory demand restraint.


Resources:


  • FT – “Oil buyers ready emergency stocks action” – April 3, 2012
  • Agreement on an International Energy Program (as amended on 25 September 2008)