August 21, 2008


All the Oil We Need (EUGENE GHOLZ and DARYL G. PRESS. 8/21/08, NY Times)

[S]uch fears rest on a misunderstanding. The world actually has enormous spare oil capacity. It has simply moved. In the past, major oil producers like Saudi Arabia controlled it. But for years the world’s major consumers have bought extra oil to fill their emergency petroleum reserves.

Moreover, whereas the world’s reserve supply once sat in relatively inaccessible pools, much of it now sits in easily accessible salt caverns and storage tanks. And consumers control the spigots. During a supply disruption, Americans would no longer have to rely on the good will of foreign governments.

The United States alone has just more than 700 million barrels of crude oil in its Strategic Petroleum Reserve. Government stockpiles in Europe add nearly another 200 million barrels of crude and more than 200 million barrels of refined products. In Asia, American allies hold another 400 million barrels. And China is creating a reserve that should reach more than 100 million barrels by 2010.

Those figures only count the government-controlled stocks. Private inventories fluctuate with market conditions, but American commercial inventories alone include well over a billion barrels. Adding up commercial and government stockpiles, the major consuming countries around the world control more than four billion barrels.

Some policy makers and analysts worry that these emergency stocks are too small. For example, they sometimes compare the American strategic reserve to total American consumption, so the reserves appear dangerously inadequate. The United States consumes about 20 million barrels of oil every day, so the Strategic Petroleum Reserve could only supply the country for 35 days. (Furthermore, the United States could not draw oil out of the reserve at anything approaching a rate of 20 million barrels per day.) This is why President Bush in his 2007 State of the Union address called for doubling the strategic reserve.

But this vulnerability is a mirage. The size of plausible disruptions, not total consumption, determines the adequacy of global reserves. The worst oil disruptions in history deprived global markets of five million to six million barrels per day. Specifically, the collapse of the Iranian oil industry during the revolution in 1978 cut production by nearly five million barrels a day, and the sanctions on Iraq after its conquest of Kuwait in 1990 eliminated 5.3 million barrels of supply. If a future disruption were as bad as history’s worst, American and allied governments’ crude oil stocks alone could replace every lost barrel for eight months.

Current fears about energy security focus on Iran. For example, Tehran could sharply cut its oil exports to drive up global prices. Of course, this would be the economic equivalent of suicide terrorism: oil exports provide more than 80 percent of Iranian government revenues, and a major cutback would wreck Iran’s economy.

It would also be futile because the industrialized world could easily replace Iranian oil. Iran only exports 2.5 million barrels each day. A coordinated release of reserve crude by the United States and its European and Asian allies could replace missing Iranian barrels for a year and a half. Iran is vulnerable; the West is not. that Saddam needed to pump as much oil as he could just to fund his regime. If all America cared about was cheap gasoline he'd be sitting in Kuwait smoking a stogie and feeding Shi'ites into paper shredders today.

Posted by Orrin Judd at August 21, 2008 4:07 PM
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