Sam Fletcher
Senior Writer
HOUSTON, Mar. 17 -- A study of strategic oil stocks in some 50 countries shows a variety of arrangements under the general guidelines of the European Union and the Paris-based International Energy Agency that would determine when and how those supplies would be released in an emergency, Energy Market Consultants Ltd., London, reported Friday.
Some 1.4 billion bbl of oil placed in strategic stockpiles worldwide is potentially available to ease any supply shortfalls if US-led forces take military action against Iraq, EMC officials said. That would be equivalent to 2 years of oil exports from Iraq at recent rates under the oil-for-aid program administered through the United Nations, or 1 year of combined exports from Iraq and Kuwait, if war slopped over their common border to disrupt Kuwaiti production and exports.
"If Kuwait goes as well, then strategic stocks will be needed in (the) short term," said Michael Barry with EMC in London. "However, the loss of 2 million b/d of Iraqi production might be convenient for other OPEC members, as we see demand for OPEC oil from the second quarter at 2 million b/d below its current output level of 28 million b/d."
EMC said total production by the Organization of Petroleum Exporting Countries might have exceeded 28 million b/d in early March, although Iraqi exports fell to 1.4 million b/d.
OPEC ministers meeting in Vienna last Tuesday agreed to maintain their current net production quota of 24.5 million b/d, excluding Iraq. But there was no discussion of suspending production quotas, as some observers had hoped.
Strategic reserves
In addition to strategic oil reserves held by governments, EMC estimates oil companies hold another 700 million bbl of oil in "compulsory stocks" under minimum requirements imposed in Europe, Japan, and South Korea by the EU and IEA.
IEA officials reported Feb. 20 that combined publicly and privately held stocks among its members equaled 115 days of net imports at 25 million b/d (OGJ, Oct. 10, 2003. p. 7). Those stocks, crude and product, are near IEA members' refineries and distribution points and "can be made available rapidly to markets," the agency said.
EMC's estimate is lower because it considers only potentially available compulsory stocks after accounting for normal operating stocks. But despite a substantial safety hedge against oil supply disruptions, EMC said, "Governments in main oil-consuming countries are running the risk of oil prices hitting $40/bbl for the fourth time in 25 years, as they seem to have readopted the policy of using strategic stocks as a 'last resort.'"
The Organization for Economic Cooperation and Development countries should start pulling down strategic stocks "if Kuwait goes down as well as Iraq," Barry told OGJ on Friday. However, he said, those countries may have to dip into strategic reserves "at the start of the war, as last time (in 1990) to stop oil market speculators from trying to push prices through the roof."
US officials would authorize release of oil from the Strategic Petroleum Reserve "only in consultation with our IEA partners," Sec. of Energy Spencer Abraham recently told the Senate Energy and Natural Resources Committee while testifying on his agency's fiscal year 2004 budget request (OGJ, Oct. 10, 2003. p. 7). He reiterated that the White House's policy is that the 600 million bbl US emergency stockpile should only be used to counteract a "severe" supply disruption, not to control prices.
The Bush administration also resisted pressure from some East Coast lawmakers and heating oil dealers to order withdrawals from the 2 million bbl Northeast Home Heating Oil Reserve. Abraham said conditions do not warrant such a release, despite recent spikes in US heating oil prices.
But after heating oil prices hit a 23-year high at $1.10/gal on the New York Mercantile Exchange in early February, Paul Horsnell, head of energy research for JP Morgan Chase & Co., London, said the "trivial" US heating oil reserve "should be released . . . although it will not make any dramatic amount of difference, given the extent of the tightness in heating oil (OGJ, Feb. 17, p.5)."
SPR currently holds 54 days of what DOE calls "import protection." But when combined with private stocks, the inventory available to US consumers is about 150 days of net import demand, according to DOE.
However, James L. Williams, president of WTRG Economics and publisher of Energy Economist Newsletter, and A.F. Alhajji, associate professor of economics at the University of Northern Ohio, Ada, Ohio, recently reported: "By every measure of petroleum security or vulnerability that we have examined, the US is as vulnerable, and in most cases more so, than at the time of the 1973 embargo" (OGJ, Feb. 3, 2003. p. 20).
They said, "Domestic production is about half of what it was then, dependence on imports is 50% higher, the number of days that stocks can replace imports is 5% lower, and a larger percentage of imports is concentrated in a few suppliers. In addition, any military action in Iraq would result in the elimination of most of the world's excess capacity for an indeterminate period of time."
Market monitors
Meanwhile, IEA officials have said they are monitoring market conditions and might call on members to release stocks if they feel that oil producers cannot keep up with demand. But price levels alone won't trigger a response, they stressed.
The IEA charter calls on member countries to release their stocks if oil supplies are cut by more than 7%, but the agency said it has the authority to act below those levels if market conditions compel it to take action.
As part of its emergency contingency planning, IEA also calls on member countries to hold oil stocks equivalent to 90 days of net imports from the previous year.
A sharing obligation is central to IEA's emergency oil supply program. The group's oil-importing members must hold oil in state-controlled inventory, earlier estimated at 1.3 billion bbl total, with the US accounting for nearly half (OGJ Online, Feb. 28, 2003). All 26 members must share oil in a supply emergency.
Recent proposals by the European Commission that IEA's 90-day minimum requirement for oil stocks should be gradually increased to 120 days and that the commission be given power to manage those stocks in case of a crisis, with the help of a committee representing member countries, were greeted with skepticism by IEA officials, oil companies, and some member governments (OGJ Online, Sept. 18, 2002).
Policy differences
EMC's recent study of strategic oil stock policies among all 30 member OECD countries and "some 20" other nations found a variety of systems under IEA and EU guidelines. Differences included the split between strategic and compulsory oil stocks; the amount of stocks held abroad; emphasis on demand restraint vs. stock withdrawal during periods of crisis; price triggers for withdraws; whether strategic or compulsory stocks are to be released first; and the actual terms of release, including pricing and sale methods.
The study was just released to EMC's retainer clients but will be available later to other buyers.
Apart from US plans to increase SPR to 700 million bbl over the next few years, EMC said, stock building in other areas of the world could total 400,000 b/d. That's the "biggest surprise" uncovered by EMC's study, said Barry.
Plans for building strategic stocks have been announced in China, India, Japan, South Korea, and Japan and are under consideration in Russia and Ukraine. "In addition, most applicants for EU membership in central Europe are implementing, or will need to apply, plans for raising security stocks to EU 90-day minimum," EMC reported.
OPEC may still have 1.5-2.5 million b/d of spare production capacity that it could bring on stream in an emergency, "depending on how fast Saudi Arabia can raise output to its full 10.5 million b/d capacity," said EMC officials. That spare capacity "could just about cover the loss of Iraqi output," they said.
Tina Vital, integrated oil and gas equity analyst at Standard & Poor's, puts OPEC's spare production capacity at 1.5-3 million b/d. But with Venezuela's oil production and exports still severely reduced by the political strife in that country, she said, "If a conflict in the Middle East spills over into Kuwait, we believe OPEC may not be able to cover the shortfall, raising the prospect of additional hikes in oil prices."
Moreover, Williams and Alhajji concluded, "The lack of public information regarding the amount of storage by the Saudis and others in the Caribbean region makes it difficult to predict the amount of stocks available to US markets. In fact, if rumors about a large storage build-up in the Caribbean are correct, the US may suffer from a period of high oil prices even though supplies actually may be sufficient."
Contact Sam Fletcher at [email protected]
