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Tue 28 Jun 2011 10:08 AM

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Intervention in oil is necessary evil

In the current economy, IEA's monitoring of OPEC's affairs shouldn't be judged too harshly

Intervention in oil is necessary evil
(Getty Images)

Governments should not intervene in markets. It's unfair to the regular players and can backfire. That is an important principle to uphold. But the International Energy Agency's intervention in the oil market shows the limits of this philosophy.

It's not easy to control deep, liquid markets like currencies and many commodities. Just ask the Swiss central bank. Its franc intervention left it with a $25bn pain in the vaults in 2010. Even if intervention is effective in achieving policy goals, there can be a heavy price to pay if investors lose confidence because of the arrival of an unpredictable participant driven by political motives.

The IEA case may be an exception. It's not as if oil is a well-functioning market. Oil prices are already being buffeted by a disunited OPEC and speculative flows arising from the money printing being used to avert a double dip. The IEA move is a necessary counter to both. OPEC says the world economy is well supplied with oil. But prices in excess of $100 per barrel are at levels that would normally be expected to cause recession. OPEC could have responded at its June meeting by promising to increase supply. It failed to do so. Perhaps ultra-high prices suited it too well.

What's more, it's clear that the intervention is having an effect: oil prices have fallen sharply. Goldman Sachs says it may revise down its three-month forecast for Brent crude by $10 to $12 per barrel to $105 to $107 - a significant return for the IEA gamble.

But the IEA lever is relatively small. The 60 million barrels release, spread over 30 days, is equivalent to about 4 percent of the total international strategic reserve and compares to global oil demand of 89.3 million barrels per day, the IEA says. The reality is that the IEA cannot intervene much without depleting its reserves. The market knows this. But the IEA is helped by the fact that oil prices were already showing some tendency to fall amid global growth fears and the US Federal Reserve's studious silence about a third round of quantitative easing.

The IEA's move may be an unusual case of intervention that is both effective and has limited damaging side-effects. In the current dangerous economic circumstances, it shouldn't be judged too harshly.

(Ian Campbell is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

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rey kardoso 8 years ago

It is clear that the oil major producers have grown too ambitious and are no longer contented with a reasonable balanced rate of return on their investments. The world economy has significant interdependencies interwoven in all aspects and thus no one group of suppliers should have throat-choking tendencies and therefore, an action like that done by the IEA is not only necessary but also very cognizant of the danger that certain irresponsible elements of the world supply chain are trying to impose their tunneled views on what constitutes a responsible return on investment.