Questions raised over the wisdom of dipping into Japan's oil reserves

Earlier this week, U.S. President Joe Biden attempted to influence the oil market by announcing the release of 50 million barrels of crude from the Strategic Petroleum Reserve — the largest release of its kind in U.S. history. Biden’s decision was part of his ongoing efforts to lower prices and to address the lack of supply around the world.

Other major energy consuming nations including China, India, Japan, South Korea and the U.K. made similar moves. In Tokyo, Prime Minister Fumio Kishida said that Japan is acting along with the United States to sell a portion of its national oil reserves “in a manner that does not violate its Petroleum Reserve Law.”

The decision, the first release of Japan’s national oil reserves aimed at bringing oil prices down, is unprecedented. The current national stockpile is sufficient for 145 days, exceeding its target of 90 days. Government officials tried to describe the release as “not primarily for lowering prices,” but rather “a regular transaction to sell the surplus.”

Japan’s oil industry has reportedly questioned the decision to tap into the national stockpile, which was considered a “last resort” move.

Mainstream media outlets in Japan were also skeptical about the decision. Major dailies, liberal and conservative, were unusually unanimous in questioning the wisdom of the measure.

The Mainichi newspaper wrote “no strategy for price stability in sight.” The Yomiuri asked, “Will unprecedented measures stop soaring prices?” and the Sankei urged that “cooperation with oil-producing countries is needed.” The Nikkei, a financial daily, was also critical and even wrote “Releasing oil stockpiles is not a means of market intervention.”

A surge in oil prices is, of course, nothing new. When I was studying Arabic in Cairo, Egypt, from 1979 to 1981 as a foreign service officer, the nominal crude oil price almost tripled during those three years from $12.8 to $42.8 per barrel, which is more than $100 per barrel value at the present. Before 1972, however, the nominal oil price had been stable, below $5 per barrel, for more than a century.

The nominal oil price was suddenly raised by the Arab oil-producing nations from $3.01 to $11.65 per barrel in 1973. The reason for the price hike was that the U.S. oil production capacity had peaked in 1970 and Washington could no longer pump additional oil to stabilize the market when the October War between Israel and a coalition of Arab states broke out in 1973.

A commonly held myth about oil is that war and conflict would raise prices. But history shows that this is not necessarily the case. Despite the Korean War in 1950, the Suez Crisis in 1956, the Cuban Crisis in 1962 and the Six-Day War in 1967, crude oil prices had been quite stable mainly because the United States had sufficient additional oil production capacity. Since 1973, however, no single nation has fully controlled the price of oil.

Going forward, here’s my take on the bigger questions on oil prices.

Can soaring prices be stopped? Probably not. Biden knew that his decision would not solve the problem of high gas prices overnight. He said, “It will take time, but before long, you should see the price of gas drop.” That may not happen in the foreseeable future.

The Department of Energy reported that U.S. petroleum use averaged approximately 20.5 million barrels of oil per day in 2019. A simple calculation shows that the 50 million barrels only constitute less than three days of oil consumption in the United States. The situation is similar in Japan.

Releasing the oil reserves most likely is a gesture by Biden to show people that the White House is “taking action.” Reportedly, Biden had been privately advised that the release from the reserve would not effectively lower current prices and the option to release oil reserves was one of his few available courses of action on the table.

Will oil companies cooperate? Biden blamed the oil producers. He said: A “big part of the reason Americans are facing high gas prices is because oil producing countries and large companies have not ramped up the supply of oil quickly enough to meet the demand.”

Unfortunately, this is not a very powerful argument. The Biden administration reportedly asked the Saudis, one of the biggest and most influential oil producers in the world, to do something. Saudi Arabia, however, seems to have adamantly refused to increase its output. Over the past few years, oil producing countries have suffered under low prices, severely damaging their economies.

Oil producers and dealers, foreign and domestic alike, are making economically reasonable decisions. Simply put, they do not want to increase supply and sell cheap. Since the United States lost its dominant market power in 1970, no nation, including Russia and Saudi Arabia, has completely controlled the global energy supply.

Biden, however, said this week that “in the longer term, we will reduce our reliance on oil as we shift to clean energy.” I wondered how he could do that. One option to deal with the current crisis may be to increase its domestic oil production, but the Biden administration does not seem to be interested.

One reason for that lack of interest may be because the U.S. president officially stated just a few weeks ago at the COP26 U.N. climate summit that the United States would “lead by example” on clean energy initiatives. Making a commitment is free to make but implementation is hard to achieve. Fossil fuels are easy to criticize but they are still indispensable in modern societies.

No country, including the United States and Japan, can have it both ways. To cope with the climate crisis and achieve decarbonization, reducing the use of oil, gas and coal must be carefully planned and wisely coordinated.

What we are witnessing is exactly the opposite. We must review our policies or we may fail both in growing the world’s economies and preventing global warming.