With terrorism worries and instability plaguing producers, the tap could run low at any time.
By Warren Vieth
Times Staff Writer
LA Times, September 14, 2003.
Could America be in store for another oil shock?
Some of the threats to the nation's energy security are long-running: Dependence on imported oil is climbing. Domestic production is falling. Inventories are dwindling. And demand is mushrooming.
But there is at least one gesture Bush can make that would have a positive effect on Africans, and it wouldn't cost U.S. taxpayers a penny. He can lean on Big Oil to clean up its role in the region's corrosive corruption.
Yet two years after the Sept. 11 terrorist attacks, these trends have taken on a more sinister tone because of geopolitical instability.
Saddam Hussein's regime in Iraq â€” home to the world's second-largest oil reserves â€” has been toppled, but the country remains a battleground and is struggling to resume a high level of oil exports. Saudi Arabia, the biggest oil producer and the supplier of last resort in the event of a severe shortfall, faces an increasing threat of terrorism on its own turf.
"As long as Iraq is out, more of Saudi Arabia's spare capacity is being used up. And it's Saudi Arabia's spare capacity that prevents shocks if something goes wrong somewhere," said Adam Sieminski, Deutsche Bank global oil strategist in London. "So until Iraq comes back in and eases the situation for the Saudis, we're subject to more upside shock potential."
The first great oil shock occurred in October 1973. Angry about America's support of Israel in the Yom Kippur War, Saudi Arabia helped orchestrate the Arab oil embargo, cutting production and curtailing exports to the United States and key allies. Crude prices quadrupled, lines formed at gas stations and the U.S. economy plunged into a deep recession.
A second major shortfall followed the Iranian revolution of 1978-79. Iran didn't export oil for months, and other producers couldn't make up the difference. Prices more than doubled.
The world today consumes 78 million barrels of oil daily, and analysts say it would take a sustained shortfall of 3 million to 4 million barrels a day to wreak serious economic havoc. The invasion of Iraq in March took 2.5 million barrels a day off the market; Iraq now is producing about 1.5 million and exporting 900,000.
Other countries have stepped in to fill much of the gap left by Iraq. But few have the spare capacity to offset a more severe loss. Kuwait, Qatar and the United Arab Emirates, members of the Organization of the Petroleum Exporting Countries, together could boost production by about 500,000 barrels a day. A handful of non-OPEC countries probably could come up with an additional 200,000.
Only Saudi Arabia could offer more; the kingdom produces about 8.6 million barrels a day but has the ability to pump at least 10 million, serving as the world's safety valve.
The worry is that a terrorist attack or a political upheaval would shut that valve off.
"The risk is very real, and it's very imminent," said Gal Luft, executive director of the Institute for the Analysis of Global Security in Washington.
Industry analysts and Middle East specialists cite several dire scenarios. Former CIA operative Robert Baer said the kingdom's oil infrastructure could be crippled for months by one or two well-placed terrorist attacks. In May, the Saudis were shaken by a suicide bombing at three residential compounds that killed 34 people â€” an attack making clear that the kingdom, long suspected of exporting terrorism, now must confront the scourge at home.
One possible target, Baer said, is the massive Abqaiq complex, where most Saudi crude is processed before being piped to the Gulf of Bahrain. A strike there could reduce exports by nearly 6 million barrels for two months and as much as 4 million barrels for several months thereafter, said Baer, who spent 21 years in the region.
That alone would be enough to duplicate the disruptive effects of the '73 and '79 crises.
Other high-yield targets include loading terminals at Ras Tanura and Juaymah, which together move as much as 8 million barrels a day. Platform No. 4 handles about 2 million barrels and could be knocked out by a single boat loaded with explosives, Baer said.
"All these radical groups say the way to liberate Palestine is through Riyadh," Baer said. "If you got a bunch of crazies in there, I think they would be more than willing to take that oil off the market."
Saudi exports also could be affected by a reshuffling of decision makers within the royal family, whose two-decade rule has been marked by relatively close ties to the United States.
King Fahd turns 80 this year, and the next in line of succession, Crown Prince Abdullah, is a year younger. If control passes to the next generation, accommodation could give way to confrontation.
"There could be a hardening of positions, which might lead to shutting off oil or cutting way back," Baer said.
At some point, Iraq could become a significant swing producer, lessening the West's reliance on the royal family in Riyadh to keep supply and demand in balance. Iraq has pumped as much as 3.5 million barrels a day in the past, and industry experts believe it has the potential to produce twice that.But that is years away. For now, the U.S.-led occupation is struggling to restore an oil industry debilitated by decades of intermittent war, international sanctions and government neglect, not to mention the looters and saboteurs of recent months. For the time being, Iraq can't even supply its own citizens with gasoline and cooking fuel.
Several factors may well prevent a '70s-style oil shock for the United States.
For one thing, the gas lines of that era were caused in part by government allocation schemes that have been abandoned. In addition, the United States imports much more oil from stable neighbors Canada and Mexico, offering a degree of protection it didn't enjoy in the 1970s.
At the same time, OPEC's share of total production has declined significantly since 1973 as oil reserves have been developed elsewhere, diminishing the group's ability to roil the market.
What's more, producing countries are more dependent on oil revenue than they were 30 years ago; the Saudi economy, for example, is struggling, so the kingdom's willingness to withhold supplies could be held in check by its own domestic needs. The United States and other consuming countries also have built up strategic stockpiles and drafted emergency plans to deal with shortfalls.
One way or another, shocks are inevitable," said Daniel Yergin, oil historian and chairman of Cambridge Energy Research Associates. "It's how well we can absorb them that matters."
Energy Secretary Spencer Abraham said the market's ability to accommodate the loss of some Venezuelan, Nigerian and Iraqi production this year was a case in point, noting: "I regard that as a very positive set of circumstances, ones that give me confidence we aren't going to see a '73-style outcome in the days ahead."
Still, for U.S. consumers, there are some alarming realities â€” especially at a time when Saudi oil facilities stand at risk and Iraq's future remains a question mark. In 1973, the United States imported 35% of the petroleum it consumed. U.S. import dependence declined substantially in response to the shocks of the '70s, falling to 27% in 1985. But it began rising again after oil prices collapsed in 1986. The Energy Department expects the import share to hit 55% this year, tying a record set in 2001, and to rise to 68% by 2025.
In addition - in spite of the creation in the mid-1970s of the U.S. Strategic Petroleum Reserve — America has only enough oil in storage to replace imports for 132 days. That compares with more than 300 days in 1985, according to James L. Williams of WTRG Economics in London, Ark.
The availability of alternative supplies, meanwhile, has been diminished by political crises in several countries, including Venezuela and Nigeria. The world's unused production capacity has fallen to about 2.4 million barrels a day from as much as 11 million barrels in the early 1980s.
Some analysts say the risk of a supply interruption is reflected in prices, which have remained at the high end of OPEC's target range for months. Benchmark West Texas intermediate crude closed Friday at $28.27 a barrel, down 55 cents on the day, on the New York Mercantile Exchange.
If another oil shock is to materialize, "it's a political event that's going to be the cause â€” and that's a hard thing to put a probability on," Williams said. "But if you want to pick a bad time to have a political event, it's as bad as it's ever been."
Copyright 2003 LA Times