The primary purpose of an IEA collective action is to mitigate the economic damage associated with a disruption of oil supply. By temporarily replacing disrupted supplies, the action is intended to help oil markets re-establish the supply/demand balance at a lower price level than would otherwise have been the case.
Managing oil prices is not the purpose of an IEA collective action, however, as high prices can have underlying causes which temporary emergency measures cannot address. Moreover, attempting to manage prices with emergency measures risks masking important market signals, such as the need to invest in supply infrastructure or more fuel efficient technologies, which are essential to assuring supply security in the future.
At the time the IEA was created, policy makers were primarily concerned with the physical unavailability of oil supplies and sought to define a threshold for activating an emergency response based on a specified volume of disrupted oil supply. Oil markets have changed enormously since the first oil shock of 1973-74. As a result of the liberalisation of the oil industry and the development of spot and futures markets, changes in supply and demand are quickly reflected in the international market prices of crude oil and refined products. Increases in spot prices quickly feed through into higher retail prices and the very notion of a “supply shortfall” is misplaced: a reduction of supply would cause prices to rise immediately whilst higher prices would lead to lower demand and bring the market back into balance. However, this rebalancing might require prices to increase substantially in response to a relatively small fall in supply, given the high concentration of oil use in the transportation sector where few short-term alternative options exist.
In the absence of price controls that might cause physical shortages, a sudden fall in global oil supply can cause economic damage through sudden price increases. The purpose of an IEA collective action is to limit the extent and impact of a sudden fall in global oil supply caused by a disruption. In such instances, IEA countries would want to replace lost supplies on a temporary basis in order to prevent economic damage, but they would still allow the market to set the price. Such a move is best described as an effort to stabilise the market rather than to manage prices.