As The IEA-OPEC Nash Equilibrium Collapses, Is A 1973-Style OPEC Embargo Next?

Tyler Durden's picture

Last week's dramatic decision by the US administration to strongarm the IEA into releasing strategic petroleum reserves (of which the US would account for 30 million barrels, or half of the total), is nothing but yet another example of the hobbled and incredibly short-sighted thinking that permeates every corner of the Obama administration. Because as the WSJ reports, "the move by the U.S. and its allies to release strategic reserves of oil could provide a much-needed shot in the arm for the U.S. economy, but risks inflicting lasting damage on the already tense relationship between oil producers and consumers." The move comes on the heels of the dramatic collapse in OPEC talks in Vienna two weeks ago when Saudi Arabia was effectively kicked out of the cartel, further confirmed by reports that the IEA consulted with Saudi (and China and India) in advance of its decision (more later). Additionally, "OPEC and the European Union are due to hold an energy summit in Vienna Monday that will be the first official meeting of producers and consumers since the IEA's move, and will provide a platform for OPEC members to express their disquiet over the stocks' release. However, OPEC's biggest player, Saudi Arabia, won't be present." Make that former player, in an organization now headed by the previously #2 producer, Iran (which just happens is not all that pro-US). The biggest threat, however, is that in direct retaliation against the IEA's cartel-like decision, which comes at the expense of the remaining OPEC countries, is that as Zero Hedge suspected, the next step will be a more than proportionate cut in crude production by OPEC: "Some analysts speculated that OPEC could respond to the IEA release by cutting output to offset the increased supply." What happens next is complete Nash equilibrium collapse, with a high possibility of a 1973-type OPEC oil embargo announcement in the immediate future.

"Going ahead with an increase would cut into revenue, said Christof Ruehl, chief economist of BP PLC. But cutting production to offset the release, he said, "would be seen as hostile by IEA members" and "could lead to a war of attrition, at least as expensive," in which OPEC cuts production and the IEA keeps releasing stocks to make up for the shortage." The winner of all this, is of course, China, which will gladly benefit from ongoing blue light specials courtesy of the US Strtategic Petroleum Reserve to build up its own reserve holdings, as the rest of the world squabbles over a US-dominated status quo whose time has now officially passed. And just as the rare earth metal price spike in recent weeks demonstrates what happens when China is the marginal anything in any supply chain, one can be certain that the price of Crude will be far, far higher several years from now.

And speaking of Iran, its oil ministry SHANA wasted no time in firing the retaliating round against the IEA's decision, accusing the US of acting unilaterally and purely for the benefit of Obama's reelection campaign, warning that the drop in oil prices won't persist:

Iranian governor for OPEC Mohammad Ali Khtatibi says International Energy Agency (IEA) decision to draw oil from its emergency reserves implies intervention in the ordinary function of the oil market.

Speaking to Shana, Mr. Khatibi said that the trend of falling oil prices would not be sustainable.

‘Following the failure to bring down the prices at 159th ministerial meeting of OPEC in June 8, the United States of America and Europe are using all the means to push oil prices lower, Iranian governor for OPEC said.

Khatibi noted that IEA’s initiative to release oil from strategic petroleum reserves would followed by artificial falling of oil prices but those countries believing in open markets showed they are not genuine in their believes.

According to Khatibi recent days’ developments in oil market is not the result of issues relating to supply and demand or market needs but political pressures by the United States drives the initiative. 

The United States government plans to influence the results of the upcoming presidential elections of the country by putting pressure on oil prices’ top Iranian oil official said.

Khatibi pointed out that developed countries initiative to draw oil from strategic petroleum reserves is risky because they cannot continue the move in the long term.

He added: these reserves are being held for emergency situations so the consuming countries of the International Energy Agency will have no other choice except to replenish the reserves for further use. 

Indeed, if Obama's reelection campaign is such an emergency that it requires tapping the SPR, what will happen when there is a real emergency: such as a repeat of the 1973 OPEC embargo, which set the stage for Volcker's last minute and very painful intervention to prevent the US economy from tailspinning into an inflationary supernova?

And just to make sure things get even more polarized, Dow Jones reports that the "International Energy Agency consulted Saudi Arabia, China and India before it authorized the release of some of its emergency reserves, the agency's executive director said Sunday."

"They understand, and they appreciate the action," Nobuo Tanaka said on the sidelines of the second Global Think Tank Summit in Beijing.

The release of some of IEA's strategic stockpiles is meant only to fill the gap in supply until higher crude volumes from Saudi Arabia reach the global market, he added.

Oddly enough, the leadership at the IEA is just as clueless as that of the US:

Separately, Tanaka said he asked China once again to join the IEA on Saturday. Although there hasn't been any official response, Tanaka said he was encouraged by China's recent statement publicly welcoming the IEA's strategic stockpiles release.

Of course they welcome it you idiot, because they will be buying everything your member countries have to sell, and thanks to your stupidity, at a welcome discount. And why the hell would China want to join the IEA when it gets all the benefits of participation, without any of the obligations of being a member (i.e., adhering to your retarded politically-motivated agenda).

Good luck buying it back at the same price when OPEC fires its own warning shot and announces it is reducing crude output for all remaining OPEC countries (ex. Saudi) by 10-15%. And yes, Goldman will promptly move it Brent sell recommendation to a buy, within hours of said announcement.

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Long-John-Silver's picture
Construction of a Simplified Wood Gas Generator for Fueling Internal Combustion Engines in a Petroleum emergency

http://www.gengas.nu/byggbes/index.shtml

 

Prepare now Bitchez!

Ahmeexnal's picture

Now this is real SHTF event:

http://www.foxnews.com/world/2011/06/26/british-prime-ministers-friend-f...

A close friend of British Prime Minister David Cameron has been found dead in a portable toilet at the Glastonbury music festival. 

 

And in other news, the CIA/Google democratic revolution brigade has started it's next adventure: Russia.

http://www.foxnews.com/world/2011/06/26/police-detain-about-10-khodorkov...

 

Khodorkovsky....the Russian Mandela?

StychoKiller's picture

Porta-potty® fumes can get really obnoxious...

Oh regional Indian's picture

Thanks for the links Ahmeexnal.
Very interesting twists and turns the world is taking.
When near and dear one's to PTB start dying under mysterious circumstances, it's time to pay attention. In Cliff's terminology, a temporal marker.

Plus, he was found dead in a toilet. Coincidental or otherwise, this is a loaded signature.

This coming weeks is going to be a mess by Friday it looks like. oil wars, war wars, word wars, world wars, losers and bigger losers.

ORI

http://aadivaahan.wordpress.com/2011/06/21/thunder-perfect-mind/

spanish inquisition's picture

Signature explanation (Tin foil hat on).... (use Paul Harvey voice) It seems when the CIA created a terrorist organization and needed a name, they went with a slangy version of the toilet in Arabic. The slangy name...Al-queda

Now if he was found dead in a bathtub, I would suspect Jim Morrison. (hat off)

FYI -It is best to pre crinkle and double line your hat for maximum beam disruption effect.

Salah's picture

What a coincidence: I'm shocked, shocked I tell you! (doing my best Claude Rains impersonation)

Bilderbergers meet....and 

1. Merkel & Germans suddenly get all compliant and "want to do the right thing", re: Greece crisis, Euro, et al

2. US & IEA orchestrate the release of some 60M barrels (all sources)

What about the stuff we don't know they've planned?  or, is it true they all have our best interests at heart?

 

 

The Fonz's picture

Yeah those old wood gas generators are cool, work well and are cheap but man they are DIR-TAY.  I'd use it in an emergency perhaps but perhaps not too hot for the envioronment.

A Nanny Moose's picture

back to horse and buggy.

Buggy whips bitchez!

msamour's picture

They work well on a small scale. A friend and I are planning to build a small one for a 5 HP motor that will power a 100 amp 12 volt alternator. That will be enough to generate the required electricity to power a small car, or small farm tractor, or whatever you need to operate. After much research we found that there needs to be a complete dismantling of the aparatus every 100 hours of operation, with a pertial cleaning every 20. Over all it's better than the alternative.

Good luck everyone.

The Fonz's picture

ZH Guru meditation error! doublepost

THE DORK OF CORK's picture

I use a bean can wood gas stove occasionally when Hiking although to be honest a convential commercial gas stove is better in a wet environment.

Also think the Heineken Home Keg is a perfect size for a Hobo stove and it can also be used as a more refined stove such as below.

www.youtube.com/watch?v=o_gNEmxvpO8

Did not think you could extract fuel from the wood gasification process but I imagine it is a inefficient mechanism to extract energy , it may be best to invest in a horse and a few acres of grazing land.

dcb's picture

Drives me nots that they are releasing oil in responce to a monetary issues (barnake too cheap money). Hi we are going to fix something, which has nothing to do with the major cause. These shits won't address the real issue at all. the central bankers and too chap money. Another reason not to vote for Obama. (I voted for him before). Not again, based on the likely republican field I am not voting in the next presidential election

Long-John-Silver's picture

A simple spelling and math test should be required for voters.

jeff montanye's picture

i think dcb was typing at outraged speed, too fast for complete accuracy.  his conclusions seem cogent, even if a bit hasty should paul get the nod, imo.

The Fonz's picture

I for one agree! Spelling is something that is sacred, like a cow. Aeftr all whtiuot proper sepillng cpmonreiosn and cmomnuiaciotn is Ipmsosblie!  

 

Just poking good natured fun :)

Terminus C's picture

I hvae raed smoe sutdeis taht as lnog as the frsit and lsat leettrs are crroect the hmuan mnid can dcedoe it.

Who says spelling is important?

Marty Rothbard's picture

Dude!  Vote for Ron Paul, the UnPolitician.  He has actually read Menger, Von Mises, and Rothbard, and will end the wars, including the drug war.  You are not going to get a better offer, unless you vote Libertarian.   Oh, and he will almost certainly open the mint to gold and silver, delivered by citizens.

buzzsaw99's picture

That reminds me, I need more popcorn.

plocequ1's picture

All this talk about gas and oil reminds me. I need more propane for my Weber BBQ. I might as well enjoy my greasy phatburgers while im still alive.

Urban Roman's picture

For a popcorn woodgas generator?

Sounds like a plan ... maybe you could get a .gov subsidy like the ethanol producers.

Long-John-Silver's picture
Gasifying Corn or Cellulose to Power Electric Cars ‘Greener,’ Vastly More Efficient than Ethanol

http://www.worldfuels.com/archives/Gasification-News/XII/10/Gasifying-Co...

A Nanny Moose's picture

Liquified and fermented barley...powering ideas for thousands of years.

knukles's picture

Well there ya go.
Achieve the higher energy prices, inducing further conservation without the blame, for external handy scapegoats thus abound.
Prices high enough to justify QEinfinity.
And reason aplenty for further expansion of kinetic activities throughout the oil producing and gold hoarding world.
Necessitating further expansion of UN global resolutions to further the peace to replace the wars so cleverly approved under the guise of R2P.

Priceless opportunity to further a very specific agenda.
There will be an open newspaper/MSM quiz later.

ThisIsBob's picture

So they sold some people some oil and now they are pissed because its being used?

Urban Roman's picture

It's sort of like lending your neighbor bullets when he has a history of pointing his guns at you.

cossack55's picture

Oil? Oil? We don' need no stinkin' oil senor.

dalkrin's picture

Let the oil cease to flow!  Let the peak be realized, and the panic-buying begin!  Come on world, just grant me this one little step closer to the promised doom!  I can't take the bleating sheep herds any longer!  Let them be ripped into a new dystopia!

cossack55's picture

Excuse me. I think you misspelled utopia.

BobPaulson's picture

But in the last article on the Future of Energy there was a quote saying the world demand would reach 100 million barrels/day in 2030. You mean, that might not happen?

ArkansasAngie's picture

Unelect Washington.

Long-John-Silver's picture

A guillotine party would be more effective for real "change".

janchup's picture

The release of the equivalent to 36 hours worth of American oil consumption seems pretty insignificant.

buzzsaw99's picture

Look at it from OPEC's point of view. Oil drops $4/bbl on the front month, they sell roughly 30 mb/d. $4 x 30 mb/d x (30 days per month) = $3.6B/month. Add in some bankster manipulation and they are losing money big time. Oil prices are set at the margin, and OPEC may just prove that works both ways.

oldman's picture

Buzz,

Maybe there is no oil in the reserve

Perhaps this just another digital entry between friends

Are you going to see the oil shipped?

No, just a few ledger entries and we split the pot

The public doesn't care---they are not paying the bill

No one will say a word

Shhhh!!!!

Bobbyrib's picture

At this point Saudi Arabia will keep selling us oil as long as we stay in Iraq. Saudi Arabia fears Iran and we can use the blunder that is the Invasion of Iraq as leverage over them. When the US withdraws its troops from Iraq there will be a massive civil war (Sunnis vs. Shiites) and everyone knows it. The real winner of the civil war will be Iran when the mostly Shiite populated Iraq goes towards a government in favor to Iran (which will be much to Saudi Arabia's discontent).

Do you ever notice that whenever we say we're going to withdraw from Iraq, Saudi Arabia freaks out? They don't want to see Iran grow even more in power. We will use the Invasion of Iraq (which destabilized the region) to keep getting oil from Saudi Arabia. Remember when W promised cheaper oil after the invasion? It may be time to start thanking him, but I would recommend thanking a veteran more than him.

If everyone knows there is eventually going to be a civil war in Iraq, why would Saudi Arabia not just give up? Perhaps they need time to expand their military power and be able to counter any threat from Iran.

knukles's picture

Reality is it's the same as Greece actually defaulting; viz, why in hell do markets go through all these machinations, gyrations, swings when it is accepted that Greece will, in the end default.
Kabuki Fundamentals.

Atomizer's picture

Petrodollar recycling scam

Debt Crisis: Origins and Consequences

http://www.youtube.com/watch?v=aTIRMtZa0QA

Recycling Petrodollars

http://www.newyorkfed.org/research/current_issues/ci12-9/ci12-9.html