Managing the Release of Stockpiled Oil without Causing Chaos in the Market

In order to keep crude oil prices in check, the Biden administration has announced that it will release part of its oil reserves into the market, in collaboration with other countries such as Japan, China and the U.K.

The sudden increase in the price of crude oil could usher in high prices for other commodities and is the main source of economic problems. That these countries, which are all major consumers of crude oil, will work together on these measures is significant.

However, this announcement from the U.S. was met with a further increase in crude oil prices. This is because there is a widespread belief that oil-producing countries such as those in the Middle East restrict production in response to the movement to release stockpiles.

Compared to how much oil is in the market now, the amount that can be released from stockpiles is negligible. Can these measures really result in lower prices?

Oil-producing countries are reluctant to increase production because they believe that demand will not easily recover from the effects of COVID-19.

In the long term, demand will certainly decline due to the trend toward decarbonization. For the time being, however, a continuation of the oil supply shortage would have enormous harmful effects.

Countries that consume oil should persist in negotiating with oil-producing countries to find a balance between production and prices. Oil-producing countries also have a responsibility to be flexible in coordinating with oil-consuming nations.

After the announcement from the United States, Prime Minister Fumio Kishida also announced that he would open Japan’s stockpile for the first time.

National stockpiling began with the first oil crisis. There are 10 such stockpiles nationwide, such as the one in the eastern region of Tomakomai, Hokkaido.

From the stockpile, which contains enough for 145 days of Japanese domestic consumption, a few hundred thousand kiloliters will be sold on the market.

It is worrisome that the legal basis for the release is unclear.

The 1975 Oil Stockpiling Act provides that release from the stockpile is limited to times of disaster or if there are fears of a supply disruption. Does the desire to control prices comply with the intent of the law?

Initially, the Japanese government said that “because there is a surplus, there’s no problem.” After that, the explanation changed to “a sale to replace old petroleum with new.”

It is said that the release is in line with the intentions of the United States.

The government will also subsidize petroleum wholesalers in an effort to reduce the prices of gasoline and kerosene. That said, it is still doubtful that the subsidies will be sufficiently reflected in retail prices.

Effective support measures are needed so that kerosene demand is met and people’s lives are not affected.

The slowdown of production in the United States, the largest oil producer, is also a factor in the rise in oil prices.

The oil industry’s profits have suffered from competition with the Middle East and the effects of COVID-19, causing management streamlining to be prioritized. The Biden administration’s decarbonization policy also conflicts with increased production.

If other countries are asked to increase production, these points should be carefully explained.

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