honoluluadvertiser.com

Sponsored by:

Comment, blog & share photos

Log in | Become a member
The Honolulu Advertiser
Posted on: Sunday, October 20, 2002

Oil market has buffers in case of war with Iraq

By Ellyn Ferguson
Gannett News Service

WASHINGTON — Talk of a possible war with Iraq has some Americans picturing long lines at gasoline stations and heating-bill sticker shock.

Energy experts say consumers who flash back to the soaring prices and panic buying of the 1973 Middle East oil embargo are overreacting. What is likely, they say, is a short-term "war premium" on oil prices because of fear and speculation about a possible disruption of production.

The market could follow a scenario similar to the brief price spike during the Persian Gulf War. World crude oil prices reached $40 a barrel three months before the start of the war in January 1991, but dropped to less than $30 a barrel by Feb. 28, when the United States declared victory.

But a repeat of that assumes a lot of things, such as a similarly quick war. Other scenarios — a longer war, an Iraqi attack on Saudi Arabia's oil fields or ports, or increased terrorism directed at oil production — make predicting what will happen to prices at the pump nearly impossible.

"In some ways, I'm reluctant to talk about it because there are so many variables," said Pietro Nivola, a trade and energy policy expert at the Brookings Institution.

There are two key changes since the 1970s that should provide some buffer against the uncertainties of the world oil market.

First, the United States created the U.S. Strategic Petroleum Reserve in 1975 to provide oil for short-term emergencies. During the Persian Gulf War, the federal government took 21 million barrels from the reserve, which stores oil in salt caverns along the coast of Texas and Louisiana.

If the reserve was tapped for 4.1 million barrels a day, the maximum that could be withdrawn, it would last up to four months, replacing less than half of the foreign supplies the United States uses now.

Secondly, the United States has another advantage it did not have decades ago: more diversified sources of foreign oil.

Saudi Arabia is still one of the top foreign suppliers of petroleum and crude oil to the United States, but it's No. 2 behind Canada. Three non-Middle East countries — Venezuela, Mexico and Nigeria — round out the top five.

"We have a Strategic Petroleum Reserve, and other countries have reserve stockpiles. Markets understand that, and you're unlikely to get soaring prices," Nivola said.

But no one knows how high prices could go if there is a major disruption in world oil supplies.

"It really depends on total supply and demand," said John Felmy, chief economist for the oil industry's American Petroleum Institute.

In 1991, the world market lost a combined 5 million barrels a day in supply from Kuwait, whose oil fields were set afire by retreating Iraqi soldiers, and Iraq at a time when the world economy consumed 66 million barrels a day, Felmy said. Iraq is a smaller part of the world oil equation now, with production of up to 1.5 million barrels a day in a world that consumes 76 million barrels each day.

But Iraq has vast capacity to produce more. It has the second-largest oil reserves in the world behind Saudi Arabia.

As long as nothing catastrophic happens, Felmy said, oil should be available. But, he said, the threat of terrorism against oil tankers, as may have happened with an explosion on a French tanker near Yemen this month, is a wild card.

"Any kind of event like that causes concern," he said.

Some of the nervousness about a possible war might already be showing at the gas pump. A recent AAA national survey found an average gas price of $1.42 per gallon, about a dime higher than would be expected this time of year.

The world market price for a barrel of crude oil has fluctuated over the past few weeks, reaching a high of $30 before declining.

"Certainly we have a concern (about price spikes), but we won't know until a war occurs what will happen," said AAA spokesman Geoff Sundstrom.

Something more intangible — the psychology of fear — could cause local shortages and price surges.

"At any time (in America) half of all drivers are driving around with less than a full tank," Sundstrom said. If everyone wants to fill up at the same time, there would be problems.

The United States imports 60 percent of the oil it uses each day. A little over half of the 9.3 million barrels imported daily comes from members of the Organization of Petroleum Exporting Countries, a cartel that includes Arab and non-Arab nations. Saudi Arabia and Venezuela produce most of the OPEC oil sold to the United States.

As part of the campaign to diversify oil sources, the Bush administration is encouraging U.S. oil producers to invest in places like Russia, the third-largest oil producer in the world but a minor supplier to the United States. American officials and business people met with Russian representatives to discuss future pipeline deals.

But Russia may not be able to help immediately if the United States has to make up for Middle East oil.

While Russia is willing to sell, it is still developing the pipelines and ports that carry its oil to foreign markets. Some U.S. investors also remain leery of Russia's inconsistent tax laws and unstable business climate.

"There's a lot of work to do to make the oil more available to the world," said Frederick Lawrence, economic director for the Independent Petroleum Association of America, a trade group representing domestic producers. "At the end of the day, I don't know that Russia is a proven, reliable supplier to the United States."