Annex A.3: The Development
of Emergency Response Measures
for Oil
The 1967 and 1973 oil crises raised the spectre of
potentially large long-term politically induced
supply disruptions. As the political situation in
the Middle East became more fragile there was
growing awareness and concern about the
implications of the various choke points involved
in the international oil trade, such as the Strait of
Hormuz and Bab el Mandab between the Horn of
Arica and Yemen.
In this context there was a growing view that
security of supply would best be served by
coordinated
responses
revolving
around
increased storage. The first response came from
an initiative launched by Henry Kissinger as US
Secretary of State and involved the creation of
the International Energy Agency (IEA) in
November 1974. Central to this was the IEA’s
Emergency Sharing Mechanism. This required
the members, who were basically members of the
OECD (France initially excluded itself but later
joined), to maintain 90 days of oil consumption
(crude and products) in storage. A series of rules
were then laid down to govern the terms under
which the stocks would be released. The European Commission, feeling rather outdone by the
IEA, which was an American initiative, then
introduced its own emergency scheme along
similar lines, although the relationship between
the two schemes was never clarified. In 1978, the
USA began its Strategic Petroleum Reserve
(SPR) that involved building very large crude
storage capacity in salt caverns in Louisiana. The
creation of the SPR led to much discussion about
the role of freeriding on storage, since any release
of stocks by the SPR would dampen price spikes
internationally in what was a global market.
More recently other countries, notably China,
have been building up their strategic reserves,
helped by the oil price collapse since June 2014.
In the 1980s, further supply security measures
were effectively introduced as the result of the
development of paper and futures markets. These
initially emerged as informal forward markets
but developed into formal markets in the late
1980s—New York Mercantile Exchange
(NYMEX) and the International Petroleum
Exchange (IPE), which later became the Intercontinental Exchange (ICE) in London. This
allowed consumers (and producers) to hedge
against price volatility.
These mechanisms were tested on only a few
occasions. The first was the loss of crude supplies associated with the Iranian Revolution in
the late 1970s and the Iran-Iraq war in the 1980s.
This was not a real test because the SPR, while
having been filled, had not yet built physical
pumping capacity to recover the crude. In a very
disrupted market where the IEA decided not to
invoke the Emergency Sharing Mechanism, the
result was everyone for themselves with very
intense competition between US and Japanese
companies. The result was effectively the second
oil price shock. The next event was the loss of
Iraqi and Kuwaiti crude supplies following Iraq’s
invasion of Kuwait in 1990. The price effects of
this were initially dampened because Saudi
Arabia was carrying significant spare capacity
that it pushed into the market. At the start of the
campaign to liberate Kuwait in 1991, the IEA
released stocks, but all this did was to aggravate
price volatility. In 2005, the IEA again
announced a stock release in response to Hurricane Katrina and its impact on oil logistics in the
Gulf of Mexico. There were few takers of the
crude on offer.
There is a lively debate in the academic literature on the effectiveness of such mechanisms
and their optimal design. However, the consensus among industry insiders is that in the event of
a really serious disruption—for example closing
the Strait of Hormuz—the IEA’s scheme would
fall to pieces as governments looked to their own
national interests.
Annex A.4: The International
Renewable Energy Agency (IRENA)
IRENA was established as an intergovernmental
organisation in 2009, in order to increase the
uptake of renewable energy worldwide. Having
recognised that existing energy institutions put
Special Report 5: International Energy Cooperation and Governance
693
of Emergency Response Measures
for Oil
The 1967 and 1973 oil crises raised the spectre of
potentially large long-term politically induced
supply disruptions. As the political situation in
the Middle East became more fragile there was
growing awareness and concern about the
implications of the various choke points involved
in the international oil trade, such as the Strait of
Hormuz and Bab el Mandab between the Horn of
Arica and Yemen.
In this context there was a growing view that
security of supply would best be served by
coordinated
responses
revolving
around
increased storage. The first response came from
an initiative launched by Henry Kissinger as US
Secretary of State and involved the creation of
the International Energy Agency (IEA) in
November 1974. Central to this was the IEA’s
Emergency Sharing Mechanism. This required
the members, who were basically members of the
OECD (France initially excluded itself but later
joined), to maintain 90 days of oil consumption
(crude and products) in storage. A series of rules
were then laid down to govern the terms under
which the stocks would be released. The European Commission, feeling rather outdone by the
IEA, which was an American initiative, then
introduced its own emergency scheme along
similar lines, although the relationship between
the two schemes was never clarified. In 1978, the
USA began its Strategic Petroleum Reserve
(SPR) that involved building very large crude
storage capacity in salt caverns in Louisiana. The
creation of the SPR led to much discussion about
the role of freeriding on storage, since any release
of stocks by the SPR would dampen price spikes
internationally in what was a global market.
More recently other countries, notably China,
have been building up their strategic reserves,
helped by the oil price collapse since June 2014.
In the 1980s, further supply security measures
were effectively introduced as the result of the
development of paper and futures markets. These
initially emerged as informal forward markets
but developed into formal markets in the late
1980s—New York Mercantile Exchange
(NYMEX) and the International Petroleum
Exchange (IPE), which later became the Intercontinental Exchange (ICE) in London. This
allowed consumers (and producers) to hedge
against price volatility.
These mechanisms were tested on only a few
occasions. The first was the loss of crude supplies associated with the Iranian Revolution in
the late 1970s and the Iran-Iraq war in the 1980s.
This was not a real test because the SPR, while
having been filled, had not yet built physical
pumping capacity to recover the crude. In a very
disrupted market where the IEA decided not to
invoke the Emergency Sharing Mechanism, the
result was everyone for themselves with very
intense competition between US and Japanese
companies. The result was effectively the second
oil price shock. The next event was the loss of
Iraqi and Kuwaiti crude supplies following Iraq’s
invasion of Kuwait in 1990. The price effects of
this were initially dampened because Saudi
Arabia was carrying significant spare capacity
that it pushed into the market. At the start of the
campaign to liberate Kuwait in 1991, the IEA
released stocks, but all this did was to aggravate
price volatility. In 2005, the IEA again
announced a stock release in response to Hurricane Katrina and its impact on oil logistics in the
Gulf of Mexico. There were few takers of the
crude on offer.
There is a lively debate in the academic literature on the effectiveness of such mechanisms
and their optimal design. However, the consensus among industry insiders is that in the event of
a really serious disruption—for example closing
the Strait of Hormuz—the IEA’s scheme would
fall to pieces as governments looked to their own
national interests.
Annex A.4: The International
Renewable Energy Agency (IRENA)
IRENA was established as an intergovernmental
organisation in 2009, in order to increase the
uptake of renewable energy worldwide. Having
recognised that existing energy institutions put
Special Report 5: International Energy Cooperation and Governance
693