How does the IEA respond to major disruptions in oil supply?
10 March 2011
In 1973, members of the Organisation of Arab Petroleum Exporting Countries (OAPEC) stopped selling oil to both the US and the Netherlands following their support for Israel in the Arab-Israeli War. South Africa, Rhodesia and Portugal were later added to the list of embargoed countries, resulting in a global oil crisis.
The ensuing shortage of oil and spiralling prices led countries to seriously examine their energy security (the uninterrupted availability of energy sources at an affordable price) for, at the time, many economies were heavily dependent on oil, many countries were reliant on imports from only one region, and most had failed to invest in developing other energy sources or substitutes for oil.
The IEA was established in November 1974 in response to this crisis to help countries to develop response measures, such as the establishment of emergency reserves, and to co-ordinate a collective response to any future major disruptions in oil supply.
What causes oil supply disruptions?
The three most common reasons for disruption in the supply of oil are unforeseen technical problems, the weather – such as seasonal storms in the Gulf of Mexico - and civil unrest - such as the civil war in Libya in 2011. Military or terrorist attacks which target energy infrastructure for political motives, or disputes between governments, while rare, are other significant concerns for world oil markets.
What are IEA member countries committed to doing in the event of a disruption?
They are all committed to taking joint measures in the event of oil supply emergencies in order to avoid economic damage to their countries. They have all agreed to share energy information, co-ordinate their energy policies and co-operate in the development of rational energy programmes. Each of the IEA’s 28 member countries is also required to hold oil stocks equivalent to 90 days of its prior year’s net imports.
What is the purpose of holding these oil stocks?
Oil stocks are in place so that, in the event of an oil supply disruption likely to cause considerable economic damage to member countries, they can make their stocks available to the market in order to offset any physical shortage of oil and ensure a steady supply. A release is not undertaken to moderate prices, although it can have that impact by calming the market, and thus exerting downward pressure on prices.
Has there ever been a need to release these stocks?
Yes, on a global scale IEA member country stocks have been used three times. IEA member countries released oil stocks in the build up to the Gulf War in 1991; after Hurricanes Katrina and Rita damaged offshore oil rigs, pipelines and oil refineries in the Gulf of Mexico in 2005; and in response to the prolonged disruption of oil supplies from Libya in 2011.
What are the current levels of oil stocks in each member country?
Who owns these emergency oil stocks?
In general, IEA member countries use three approaches to meet their stockholding obligations: industry stocks, government stocks and agency stocks. Most countries use a combination of these.
- Nineteen member country governments require certain companies to hold a minimum amount of compulsory stocks, related to the size of the companies’ respective operations.
- Eight member countries directly own government oil stocks, typically financed through the central government budget and held exclusively for emergency purposes.
- In ten member countries, government or industry has established a separate agency to hold all or part of the stocks. (The structure of these agencies varies but, in all cases, compulsory stocks can only be released with government authorisation).
Are these oil stocks monitored?
Yes. All IEA member countries monitor oil stocks on a monthly basis to verify compliance with the local stockholding obligations and with the IEA and European Union (if applicable) obligations for the country as a whole. This monitoring takes the form of reported stocks data, but can be confirmed with inspections or spot-checks.
Can a country keep its emergency oil stocks abroad?
Yes. Member countries can arrange to store oil outside of their national boundaries in other IEA member countries and include such stocks as part of their minimum 90-day requirement.
What about countries outside IEA membership?
Since the IEA was established, there have been significant shifts in the global energy landscape as other countries have emerged as major energy consumers. Recognising this, the IEA work has evolved and expanded. The IEA now works closely with non-member countries to find solutions to shared energy and environmental concerns. Part of this work involves sharing the IEA expertise in handling major oil supply disruptions. For example, the IEA has been working closely over several years with China, India, Indonesia and Thailand to highlight the benefits of maintaining oil stocks and preparedness in the event of a major disruption in the supply chain. Both China and India have announced a goal to hold the same stock levels of 90 days as mandated by the IEA to its member countries.
Can an IEA member country unilaterally use the oil stocks and, if it were to do so, what would happen?
IEA member countries have emergency stockholding schemes in place not only to participate in an IEA collective action, but also to be able to respond in the case of a domestic crisis. Whenever a country uses its emergency stocks, it communicates to the IEA the details and circumstances. The stock levels in member countries are typically well above the minimum IEA level, so the use of emergency stocks does not necessarily mean going below the 90 days threshold.
What is the IEA role in determining whether or not to release stocks?
The IEA has established the Initial Contingency Response Plan for a rapid and effective collective response to an oil supply disruption. The plan works as follows:
Assessments – In the early hours of an oil supply disruption or in the build-up toward what appears likely to be a disruption, the IEA Secretariat will send all member countries preliminary assessments. This notice alerts countries to the potential call for a collective action.
Call for collective action – Should the IEA Executive Director determine that the situation warrants a collective action, he/she will issue a detailed Initial Assessment, including an Initial Response Plan for releasing a specific volume of oil in the first 30 days of the crisis.
Consultation – The Initial Assessment will initiate a period of broad, wide-ranging and swift consultations on the need for activation. The IEA Executive Director and Deputy Executive Director will be in direct contact with IEA Governing Board representatives.
Activation – If member countries agree or do not object to the proposal for joint action after a predetermined (maximum reasonable) period, the Executive Director will issue a Notice of Activation, accompanied by a public Press Release. Member countries will submit responses to a Questionnaire of Intended Contribution to the IEA and commence implementation of emergency measures within 15 days of the Notice of Activation.
Governing Board Meeting – This could be convened within a matter of days following the Initial Assessment to evaluate the situation and consider any further actions to be taken.
Follow-up/Termination – The IEA will continue to assess the disruption and implementation of emergency measures. When appropriate, the IEA will recommend bringing the action to an end and will propose a schedule for re-establishing emergency stocks in those situations where they have fallen below the mandatory 90 days.
Does the IEA speak with OPEC during major disruptions?
Yes. The IEA consults with OPEC and its major member countries to determine their ability and willingness to bring additional oil to the market. (This is a possibility because some OPEC member countries have spare production capacity.)
Does the IEA speak with other (non-IEA member countries) major oil consumers during major disruptions?
Yes. The IEA communicates with major consuming non-member countries. This communication can include determining the ability and willingness of partner countries to bring additional oil to the market, or refrain from stockpiling during a release.
Other than releasing these oil stocks, what other response measures do IEA member countries have at their disposal?
There are a number of other measures IEA member countries can introduce, including:
Demand restraint measures. These can range from light-handed (e.g. public information campaigns to promote voluntary actions) to more medium-and heavy-handed (e.g. driving restrictions or fuel rationing). These measures can be applied differently across various sectors, but road transportation is commonly targeted due to the high proportion of oil consumption it represents.
Fuel switching. This is the substitution of one form of fuel for another. Natural gas is a possible alternative to oil in the event of an oil disruption, particularly in those power generators capable of operation using either fuel.
Surge production. This is the rapid activation (within 30 days) of spare crude oil production capacity to increase oil supply.
Fuel specifications, such as environmental or quality standards, can be temporarily relaxed by governments to increase flexibility of supply.
How does the IEA help countries prepare for major supply disruptions?
Every two years the IEA conducts two different types of Emergency Response Exercises, in order to help countries practice, test and review emergency response policies and procedures.
The Exercise in Capitals tests the ability of IEA member countries to participate promptly in the Initial Contingency Response Plan (mentioned above). A hypothetical crisis scenario and proposal for initial response activation is sent without prior warning by the IEA to the Governing Board delegates of member countries and to the delegates of the Standing Group on Emergency Questions. Within a predetermined period (usually 24 hours), member countries are expected to react to the IEA proposal. If the proposed action is accepted, member countries are subsequently asked to indicate the emergency response measures with which they would participate in the proposed collective action.
The Disruption Simulation Exercise is a two-day conference, usually preceded by a one-day training session. Participants consist of emergency policy makers from member countries, the IEA Industry Advisory Board, the European Commission, representatives from some IEA non-member countries, traders and public affairs persons from oil companies and the IEA. The training session focuses on oil market basics, IEA emergency response mechanisms and on evaluation of disruptions. During the Disruption Simulation Exercise several disruption scenarios are presented, discussed and evaluated. Each scenario starts with a newswire style video which presents the key elements of the scenario. Participants break out into groups to discuss, and their results are discussed in plenary with inputs from representatives from industry and the media.
For more information and the Emergency Response Policies of individual IEA countries, click here.