Distributing Oil Stockpiles: Will Unprecedented Measures Contain the Rise in Prices?

Will coordinated action by the major oil consuming countries lead to stable prices? Governments should carefully explain the necessity of such action to their citizens and also try to engage in dialogue with oil-producing countries.

President Joe Biden has announced that the U.S. government will release its oil reserves in cooperation with other major countries, including Japan. Over the next few months, the U.S. will supply a total of 50 million barrels, enough for about three days of domestic consumption.

In response to the U.S. request, Prime Minister Fumio Kishida announced that it will release its national [oil] stockpile for the first time along with China, India, South Korea and the U.K., for a total of six countries. It is highly unusual for major countries to release their national stockpiles at the same time.

The soaring price of crude oil has become a major risk to the global economy; we can understand why they are trying to ease the situation.

In the U.S., which is a car-oriented society, people are becoming increasingly dissatisfied with the rising price of gasoline. Rising prices are one of the reasons for the decline in Biden’s approval ratings, and the release of oil stockpiles is expected to help him recover his approval ratings.

In Japan, the government intends to sell a few days’ worth of domestic demand to oil wholesalers and other companies.

Also, the price of gasoline in Japan is at a seven-year high of nearly 170 yen per liter (approximately $5.69 per gallon). However, the price is hardly critically high enough to warrant the release of the national stockpile for the first time in history. This move is most likely a sign of cooperation with the United States.

The 1975 Oil Stockpiling Act, which was enacted in response to the oil crisis of the 1970s, was designed to prepare for disasters and supply disruptions from overseas, not to suppress prices. Therefore, the policy is to maintain the amount of stockpiled oil as stipulated by the law and to withdraw a portion of the excess.

The law stipulates that the national stockpile must be at least 90 days’ worth and the private stockpile must be at least 70 days’ worth. As of the end of September, the national stockpile was 145 days’ worth and the private stockpile was at 90 days.

The release of crude oil must be kept to a minimum in case of disaster to avoid concern about supply.

However, it is unclear whether the coordinated release of crude oil will drive down the market price of crude oil. The price of U.S. crude oil futures, a benchmark, rose slightly after the announcement of the stockpile release.

On the other hand, some observers believe that oil-producing countries may slow down the current pace of increasing production to counteract this. If the confrontation between oil-consuming countries and oil-producing countries intensifies, the market could become even more unstable.

If the global economy stalls and demand plummets due to prolonged high oil prices, the oil-producing countries will be hit hard. The oil-consuming countries need to explain that stability in the crude oil market is in the interest of the oil-producing countries and persist in urging them to increase production.