IEEJ：November©IEEJ 2021

Special Bulletin
A Japanese Perspective on the International Energy Landscape (560)

November 25, 2021

US decides to Release Oil Reserves to Lower Prices in collaboration with Japanand others
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn November 23, U.S. President Joe Biden announced a decision to release strategic
petroleum reserves in an attempt to lower crude oil and gasoline prices that have stayed high. He
also offered a policy of cooperating with major oil-consuming countries such as Japan, China, India,South Korea and the United Kingdom to implement the release of oil reserves. On November 24, theJapanese government published a plan to release state-owned oil reserves in a manner to respond tothe U.S. announcement. The release, estimated at several millions of barrels, will take the form ofmoving up the replacement of oil reserves. The U.S. SPR release is reported at 50 million barrels.
Japan, the United States and others will consider details of how to release oil reserves in the future.
The oil crises in the 1970s have prompted oil-consuming countries to pile up oil reservesin preparation for emergency events such as disruptions to supply. Developed countries have taken
leadership in stockpiling oil reserves. China and India as big oil consumers have also developed
state-owned and other oil reserve arrangements in view of their increasing dependence on oil imports.
In the past, oil reserves were released in response to emergency events and supply disruptions. In
2005, the United States released its SPR in response to damage from Hurricane Katrina. On theoccasion of the 2011 Great East Japan Earthquake, Japan released oil reserves by lowering theobligated number of days to be covered by private sector oil reserves. In 2011, the International
Energy Agency led a joint release of oil reserves to cope with the Libyan crisis.
However, the current U.S.-led initiative to release oil reserves is unusual for various
reasons. First, the initiative has come to pursue lower oil prices at a time when crude oil prices
remain as high as $80 per barrel in the absence of any emergency events such as supply disruptions.
The United States implemented an SPR release alleged to seek oil price drops in the absence of any
special supply disruption under the Clinton administration in September 2000. However, theinitiative to lower oil prices is the first ever for Japan that has designed a release of oil reserves torespond to an emergency event. It is basically the first time for other countries participating in thecoordinated release. Major oil-consuming countries have thus agreed to a historic coordinated action
to release oil reserves for the purpose of lowering oil prices.
Second, the IEA, which has historically taken leadership in implementing oil marketstabilization measures including the joint release of oil reserves, has not been involved in the current
international cooperation framework for releasing oil reserves. For the IEA that has positioned an oilreserve release as a means to stabilize the international oil market in response to emergency events
such as supply disruptions, it might have been difficult to participate in the current initiative.
Another remarkable point of the current initiative is that its participants include not only the UnitedStates, Japan, the United Kingdom and South Korea as IEA members but also India and China as
non-IEA countries. The six countries accounted for 48% of global oil consumption in 2020. The1IEEJ：November©IEEJ 2021

initiative indicates that major Asian oil-consuming countries have partnered with the United States
and the United Kingdom to create cooperative arrangements to lower oil prices. Attention should be
paid to the unusual combination of the IEA’s absence and the participation by China and India. This
is interesting, given the initiative’s implications for global energy governance and the U.S.-Chinaconfrontation. Third, Japan is releasing its state-owned oil reserves for the first time under thecurrent initiative. In the past, Japan released oil reserves by lowering the obligated number of days tobe covered by private sector oil reserves. The government might have considered relations with theUnited States and agonized over what it can do under the Oil Stockpiling Act.
Attracting global attention is how the unusual international initiative to jointly release oil
reserves would influence the future international oil market. Regarding the initiative’s objective tolower crude oil and gasoline prices, some announcement effects have been seen. The key West Texas
Intermediate crude oil futures price topped $80/bbl in October and hit the year-to-date high of$84.65/bbl on October 26. It stayed high later, closing at $84.15/bbl on November 9. Later, however,the price declined rapidly to $76.10/bbl on November 19, losing some $8/bbl in 10 days. Insecurity
about the global economy and the renewed spread of COVID-19 infections in Europe might havecontributed to the crude oil price decline. However, I think that the greatest contributor might havebeen an expected U.S. SPR release and the United States’ approach to Japan and other countries
regarding the coordinated oil reserve release. As crude oil prices are determined in the futures market,market participants trade in futures contracts while anticipating future supply, demand and marketconditions. During the 10-day decline in crude oil futures prices, the most important development formarket participants was an indication of the oil reserve release. The price decline can be seen as
reflecting the indication.
However, market participants continue to anticipate future developments. On November
23 when Japan, the United States and others officially announced their coordinated oil reserve
release, the benchmark WTI futures price rose by $1.75/bbl from the previous day to $78.50/bbl.
Factors behind the price hike following the announcement of the oil reserve release may include (1)crude oil futures prices’ earlier decline discounting the oil reserve release, (2) the announced oil
reserve release falling within anticipation of market participants and (3) market participants’
speculations about how the OPEC-plus group comprising the Organization of the Petroleum
Exporting Countries and some non-OPEC oil-producing countries would react to the oil reserve
release by oil-consuming countries or whether the group would phase down its production cut as
earlier planned. Although the coordinated oil reserve release has thus served as a market-moving
factor, how it would influence the market in the future is difficult to anticipate. As a matter of course,
market participants will closely watch how the announced oil reserve release would be implemented
and how much would be released consequently. However, crude oil prices could go up or down
depending on other factors including a decision on the production cut at an OPEC-plus meeting on
December 2, potential cold waves in the northern hemisphere, COVID-19 infection conditions andglobal economic trends including Chinese and U.S. trends.
Another important issue is whether or how the current initiative to release oil reserves
would contribute to the politicization of the international oil market. As far as any oil reserve release
responds to emergency events like large-scale supply disruptions, its implementation may beunderstandable and transparent. If an oil reserve release is aimed at stabilizing oil prices, however, it
would be difficult to decide on specific price conditions and measures for implementing the release.
Such decision may become political. Such political decision could risk oil-producing countries’
reactive political decision. In this way, oil-producing and -consuming countries could dispute over2

IEEJ：November©IEEJ 2021

oil prices and escalate their confrontation. Despite the fact that the stabilization of oil prices isimportant for both oil-producing and -consuming countries, they could denounce each other and takeactions against each other. To avoid such problem, oil-producing and -consuming countries should
keep away from any situation for mutual denouncement and promote dialogue for mutual
understanding and cooperation to stabilize the market. Japan is positioned to give priority to both theUnited States and oil-producing countries and should strive to promote dialogue to stabilize themarket.

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