WATCHING WASHINGTON WAR WORRIES

with Patrick Crow Now that war in the Middle East has erupted, the oil industry can expect to find itself under attack again in Washington on price and supply issues. Fortunately, the Bush administration has taken two key steps. First, to calm the market, it will sell oil from the 586 million bbl Strategic Petroleum Reserve. Other International Energy Agency countries will draw down stocks, too. War eventually could cause crude oil prices to double on futures markets because so much of the

Jan. 21, 1991

3 min read

Now that war in the Middle East has erupted, the oil industry can expect to find itself under attack again in Washington on price and supply issues.

Fortunately, the Bush administration has taken two key steps. First, to calm the market, it will sell oil from the 586 million bbl Strategic Petroleum Reserve. Other International Energy Agency countries will draw down stocks, too.

War eventually could cause crude oil prices to double on futures markets because so much of the world's oil comes from Saudi Arabian facilities within range of Iraqi weapons.

Charles DiBona, American Petroleum Institute president, recently tried to allay those fears. He said the Saudi facilities will be hard to damage, "there is a lot of redundancy in the system," and the Saudis have "substantial spare parts" on hand.

NO FEDERAL CONTROLS

Second, the Bush administration says it will not impose petroleum allocation or price controls if the market is tight. Similar steps caused lines at gasoline stations in 1979.

However, in the absence of federal legislation (it has lapsed), states are likely to implement their own price and allocation controls. For example, Virginia, Maryland, and District of Columbia energy officials met last week to discuss restricting gasoline sales.

If states interfere with the market, administration officials may ask Congress for preemptive federal legislation.

Already, some major oil companies are limiting wholesale customers to contract volumes to keep distributors from hoarding products as a hedge against any supply shortage.

Daniel Yergin, president of Cambridge Energy Research Associates, said last week the public doesn't realize the oil industry has had nearly 6 months to prepare for a shortage.

"The oil supply situation is dramatically better than it was in August 1990, when a world class oil disruption occurred, and is a good deal more comfortable than it was even 3 months ago. This means consumers have more security margin than is generally recognized."

Nevertheless, he said, "At the first sound of guns, hoarding in the form of panic buying will begin.

"But under most scenarios, the spike will erode or come down completely in a matter of days or weeks as supply/demand fundamentals assert themselves" and as SPR oil begins flowing to market.

The National Petroleum Council's emergency preparedness committee, in a report to NPC this week, said expedited or blanket Jones Act waivers are required to allow timely movement of SPR oil. It said a long term disruption should prompt the government to relax product quality rules--such as summer volatility limits on gasoline and sulfur limits for distillates--to permit maximum refinery yields of fuels.

DEFENDING PROFITS

Finally, oil lobbyists are concerned that the Middle East war will fuel congressional anger over large fourth quarter profits oil companies are expected to post. Of course, those profits resulted from the runup in oil prices after Iraq's invasion of Kuwait.

Anticipating trouble, last week an American Petroleum Institute briefing paper noted the earnings will be compared with industry's "unusually low" fourth quarter 1989 profits, the lowest of any quarter in the 1980s.

The Energy Information Administration plans to issue a special report on the subject Feb. 15.