The United States and other oil-consuming nations said Thursday they plan to release 60 million barrels of oil from government reserves over the next month in a bid to push down soaring energy prices.
The surprise announcement had an immediate impact on global markets, pushing down the price of one benchmark grade of crude by more than $8 a barrel to about $106. The move also weighed on Wall Street, helping to drive stock prices sharply lower.
"The move is significant as it represents a reach by member countries for the remedy of last resort to high prices," said U.S. energy analyst John Kilduff at Again Capital.
Analysts said the move was aimed in large part at chasing oil speculators out of the market.
“This is the straw that breaks the camel’s back — this is the tipping point,” said Fadel Gheit, oil analyst for Oppenheimer, a leading investment bank. “The speculators will have to change their positions. Instead of betting on higher prices they have to bet on lower prices."
But with oil prices already well below their May peaks, the timing of the move brought criticism from business groups and Republican lawmakers, who accused President Barack Obama of playing politics with the country's oil reserves, which are intended to address emergencies.
"The president is using a national security instrument to address his domestic political problems," House Speaker John Boehner said in a statement. "This action threatens our ability to respond to a genuine national security crisis and means we must ultimately find the resources to replenish the reserve - at significant cost to taxpayers."
Even some Democrats were puzzled by the move.
"This decision would have been more timely if made when the disruption in Libyan oil supplies first occurred" early this year, said Sen. Jeff Bingaman, D-N.M., chairman of the Senate Energy and Natural Resources Committee. Still, Bingaman said he hopes the move helps deflate "speculative froth in the markets" and drives prices back to levels where most experts believe they should be.
The United States will provide half the release — 30 million barrels of oil — from its huge 727 million barrel Strategic Petroleum Reserve, an amount that is worth about 1.5 days of U.S. consumption, with Europe supplying 30 percent. The rest will come from Pacific OECD nations.
The consumer nations acted after OPEC failed to raise production at a meeting on June 8 and despite assurances from OPEC's biggest producer Saudi Arabia that it would lift supplies unilaterally.
"Greater tightness in the oil market threatens to undermine the fragile global economic recovery," the IEA said.
U.S. Energy Secretary Steven Chu cited political disruptions in the Middle East for the move.
"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," Chu said. "As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary."
News of the oil release sent gasoline tumbling 14 cents a gallon in the futures markets. That’s the equivalent of about $56 million a day in savings at the gas pump — or about $20 billion a year, according to Peter Beutel, an oil analyst at Cameron Hanover.
“It’s a shot in the arm for the economy,” he said. “It acts like a massive tax rebate to the American consumer.”
Overall the U.S. and IEA plan to release 2 million barrels per day onto the world market over the next 30 days, more than making up for the 1.2 million barrels daily that Libya was exporting before the current unrest.
Demand for oil is typically highest in July and August, peak of the summer driving season, according to the Energy Department.
The amount of oil released Thursday represents just a drop in the bucket of daily crude oil demand and will have little impact on the balance of supply and demand.
“I don't see what the release of 60 million barrels of oil adds to the market," said Christophe Barret, an oil analyst at Credit Agricole. “We don't need it in terms of levels of stocks; we are 35 million barrels above the five year average already. It's the equivalent of two months (of) Libyan production, so I'm not sure it will make much difference (in terms of supply.)”
For a FAQ on the IEA’s decision, click here.