Will concerted action by major crude oil-consuming countries lead to price stability? The governments of these countries should not only thoroughly explain the necessity of such a measure, but should also make efforts to hold dialogue with oil-producing countries.
U.S. President Joe Biden has announced that the United States will work with other major countries, including Japan, to release oil from state reserves. The United States plans to supply a total of 50 million barrels of oil, equivalent to about three days of its domestic consumption, over the next few months.
At the request of the United States, Prime Minister Fumio Kishida announced that Japan will release oil from its state reserves for the first time. Six countries, also including Britain, China, India and South Korea, will release oil from their state reserves. It is highly unusual for major nations to take concerted action to release oil from their national stockpiles.
The rise in crude oil prices has become a major risk to the global economy, and the attempt to calm the situation is understandable.
In the United States, an automobile society, public discontent is growing due to rising gasoline prices. As higher commodity prices have contributed to Biden’s falling approval ratings, the release of oil from state reserves is seen as an attempt to revive those ratings.
The Japanese government is considering selling oil equivalent to a few days of domestic demand, mainly to oil wholesale companies.
In Japan, gasoline prices are close to ¥170 per liter, the highest level in seven years. But the prices can hardly be called critically high enough to warrant the first release of the national stockpiles. So the move may be largely because the Japanese government has taken into consideration the significance of its cooperation with the United States.
The Oil Stockpiling Law, enacted in the wake of the oil crises of the 1970s, is designed to prepare for disasters and supply disruptions from overseas. Suppressing prices is not its original purpose. For that reason, the government intends to continue to hold the amount of reserves stipulated by the law, while releasing part of the surplus in excess of the legally mandated reserves.
The law stipulates that national stockpiles should be enough to cover more than 90 days, while private stockpiles should be sufficient for more than 70 days, among other rules. According to the government, as of the end of September, national stockpiles had been secured for 145 days, with private stockpiles for 90 days.
The release should be kept to a minimum in case of a disaster or other unforeseen events, so that there will be no fear over the oil supply in the future.
On the other hand, the effect of the coordinated releases to push down crude oil prices is unclear. Benchmark U.S. crude futures prices rose slightly after the U.S. announcement of the release of its state oil reserves.
Conversely, there is speculation that oil-producing countries will curb their production pace to counter the coordinated releases. If conflict between oil-producing and oil-consuming countries intensifies, the market could become even more unstable.
If the global economy slows down due to a prolonged rise in crude oil prices and demand for oil plummets, oil-producing countries also will be hit hard. Oil-consuming countries need to persistently urge oil-producing nations to increase crude oil production by explaining to them that the stability of the crude oil market itself is in the interest of oil-producing countries.
— The original Japanese article appeared in The Yomiuri Shimbun on Nov. 25, 2021.