WATCHING WASHINGTON MIDDLE EAST WAR AND OIL

Dec. 3, 1990
with Patrick Crow The Bush administration's resolve to get Iraq to give up Kuwait has increased the prospects for war in the Middle East early next year. And that has some lawmakers in Washington concerned about the prospects for energy supplies early next year. Reps. John Dingell (D-Mich.), House energy committee chairman, and Phil Sharp (D-Ind.), energy and power subcommittee chairman, recently warned President Bush the nation may be unprepared for war in terms of energy.

The Bush administration's resolve to get Iraq to give up Kuwait has increased the prospects for war in the Middle East early next year.

And that has some lawmakers in Washington concerned about the prospects for energy supplies early next year.

Reps. John Dingell (D-Mich.), House energy committee chairman, and Phil Sharp (D-Ind.), energy and power subcommittee chairman, recently warned President Bush the nation may be unprepared for war in terms of energy.

A WARNING FOR BUSH

"Should there be combat, we likely would confront a short term shortfall in crude oil and refined product supplies," they said. "As we have learned from recent history, even the general belief-justified or not-that there are or may be shortages can lead to disruptions in the energy market.

"We know that any armed conflict in Iraq or Kuwait could at least temporarily disrupt crude oil and refined product shipments from the Persian Gulf, and the use of fuel in the region likely would increase in the event of war.

"In addition, fear and speculation about the loss of oil producing capacity would be rampant. The result would be higher prices and disrupted energy supplies."

They urged Bush to begin work to mitigate the effects a war would have on energy supplies and thus on the economy.

They suggested he call for more conservation, begin building substantial product stocks, and promote short term fuel switching. They added the U.S. should agree with its allies beforehand to draw down strategic petroleum stocks in the event of war.

Meanwhile, Energy Sec. James Watkins has been trying to allay such concerns.

On the eve of a trip to Saudi Arabia, he said the U.S. and its allies will be able to protect Saudi oil fields and shipment of Middle East oil through the Persian Gulf if war breaks out.

And he said world production has been increased so much that a war would not result in a crude shortage. He pegged the world's surplus productive capacity at 1 million b/d by Mar. 1, 1991.

Watkins said administration officials plan to "jawbone" traders in an attempt to break the self-fulfilling prophecy that war would more than double oil prices.

LICHTBLAU'S VIEW

John Lichtblau, chairman of the Petroleum Industry Research Foundation, was less sanguine when he testified last week at a House banking committee hearing.

"Even though world oil production is about back to where it was in July, despite the continued near total interdiction of Iraq-Kuwaiti exports, the world supply/demand balance is not back to normal," he said.

"One reason is that, unlike before the crisis, there is virtually no spare capacity left in world oil production. Thus, even a small further supply disruption be it political, technical, or accidental--would have a disproportionate impact on prices."

Lichtblau said if war occurs there is a distinct possibility some of the Persian Gulf region's oil production or shipments will be affected.

Hence, current crude oil prices include a war premium that moves up and down with the probability of an outbreak of hostilities.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.