Oil Squeeze

Ripples from Iran

With this winter's sudden spate of gasoline shortages now beginning to disappear, can motorists count on a hassle-free spring and summer on the highway? Hardly. By Memorial Day or shortly thereafter, shortages may start appearing all over again.

The problem this time is the Iranian oil shutoff. At first, U.S. officials dismissed the Iranian oilfield strike as a temporary phenomenon of no great consequence. But the strike has been dragging on since late October, and for the last month virtually no crude at all has been pumped out of the ground. Last week, in fact, the U.S. faced the bizarre situation of having to rush an emergency shipment of 200,000 barrels of diesel fuel and gasoline to Iran because local refinery output is insufficient to meet domestic needs.

Washington brows are beginning to furrow at the prospect that the U.S. might wind up with not even enough oil for itself, let alone anyone else. The nation depends on Iran for only about 5% of its petroleum needs, but other countries are nowhere near so lucky. Worldwide, Iran normally supplies about 20% of the total petroleum imports of all the consuming nations. Japan usually relies on Iran for 15% of its needs, and Western Europe generally is heavily dependent on Iranian oil, as is Israel, whose oil needs the U.S. has pledged to fulfill in the event of shortages. If the flow of Iranian oil remains stopped up for very long, the industrial nations will have to begin sharing the still available supplies. If that happens, the U.S. could suffer much more than a 5% drop in its normal supply and availability of crude.

So far, Saudi Arabia has helped to make up for the loss of Iran's oil by boosting its own output nearly 30% to some 10.3 million bbl. a day, close to the maximum that it is presently possible to pump from the Saudi fields. Iraq, Nigeria and Kuwait have also increased production somewhat. Right now, total world production is off by about 2 million bbl. a day. That is roughly equal to about 4% of global petroleum consumption, or more than enough to supply all the daily needs of Britain or Canada.

The oil companies are presently filling the gap by drawing upon their inventories, but that cannot continue for long. Even if all of Iran's striking oilworkers were to go back to their jobs this week, it could take as long as six months to bring the country's production back to an acceptable level. Oilmen actually say that if shortages of gasoline and other refined products are to be prevented from developing later this spring, the Iranian fields must start coming back on stream in the next six to eight weeks--a highly questionable prospect, given the country's political situation.

Occasional gasoline shortages this summer would merely foreshadow inevitable and worse dislocations next winter. Usually, the oil companies draw down their inventories steeply during the winter months anyway, then use the spring and summer to replenish their stocks. But U.S. inventories are already 10% below what they were this time last winter; they now stand at some 298 million bbl., or about a one-month supply. So if Iran's production is not resumed soon, says Energy Secretary James Schlesinger, "we would face much larger drawdowns next winter than we will have the resources to maintain."

In such a situation, refineries should be able to tap emergency supplies from the Government's Strategic Petroleum Reserve, but the three-year-old program is a shambles. Construction work is far behind schedule at the massive underground salt domes along the Louisiana and Texas Gulf Coast, where approximately a one-month supply of oil, or 248 million bbl., is supposed to be stored by year's end. So far only about 80 million bbl. of crude--little more than a week's supply--has been stockpiled. What is more, Energy Department technicians are still struggling with technical problems regarding the seemingly elementary task of getting the oil out of the ground. These difficulties, as well as the ever rising cost of the imported oil involved, are sure to push the cost of the program far above the currently planned $14 billion.

Officials at DOE remain publicly confident that a supply crunch can be avoided this year, but privately they are not so sure. Says one Schlesinger aide: "We're walking a fine line. We want the public to be aware that we are facing a potentially serious situation so that people will conserve oil, but we don't want to scare them."

Just to be prepared, DOE has drawn up contingency plans that begin with compulsory allocation of supplies to industry and culminate in actual gasoline rationing for the public. If Iranian production has not been substantially restored, and if voluntary measures have not cut consumption, then mandatory allocation will be brought in on a trial basis If stocks are still not being rebuilt, rationing would be imposed. Each car owner would be sent ration checks every three months specifying the number of gallons he could buy. The checks could be turned in at banks or other financial institutions in return for coupons that would have to be handed over at gas stations. The coupons might also be sold openly for whatever someone is willing to pay for them thus allowing drivers to get extra gasoline without having to ask DOE for special dispensations.

One thing that DOE can do nothing about is the prospect of yet another increase in oil prices. Even a small scarcity in such a valuable commodity can produce large jumps in cost, and that is exactly what is now happening on the so-called spot market. There, oil companies bid for any available crude that is not already committed to customers under long-term contracts. Though the quoted long-term OPEC price currently stands at about $13 per bbl., spot-market oil last week was trading for as much as $17 per bbl. Warns Energy Economist John Lichtblau of the Petroleum Industry Research Foundation: "The OPEC countries are free to adjust their prices if they want to, and they could well increase them so that not only will spot prices go up, but official prices as well, at least temporarily." It seems that the energy crisis is turning out to be less the moral equivalent of war--as Carter has called it--than the equivalent of Chinese water torture.

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