Is a Third Oil Crisis in the Offing? Jordan Times (Amman) Dr. Mamdouh G. Salameh

June 29, 2000

Amman - A year ago crude oil fetched less than $10/barrel and some experts feared it would sink to $5/b, risking the collapse of oil-dependent economies. Today the price is up to $28/b and a supply squeeze may even force it higher. Stocks are already at a 10-year low in the OECD countries. The price increase moved the issues of energy policy from the back pages of the business section to the front pages because the world may be confronted by a third oil crisis soon.

The world experienced two "oil crises" during the last 30 years of the 20th century. The first occurred in 1973 following the Arab-Israeli War. The second took place in 1979 following the Shah's of Iran fall from power. It can be argued that a third "oil crisis" began in March 1999 and is now gaining momentum.

To defend this assertion, it is necessary to describe with some precision the meaning of the tern "oil crisis". For economic purposes, an oil crisis is defined here as an increase in oil prices large enough to cause a worldwide recession or a significant decline in global economic activity. Here "significant decline" is defined as a reduction in the growth of real GDP below projected rates by two to three percentage points.

The 1973 and 1979 episodes both qualify as oil crises by this definition. The 1973 oil crisis caused a decline in GDP of 4.7 per cent in the United States, 2.5 per cent in Europe and 7 per cent in Japan whilst the 1979 oil crisis caused world GDP to drop by 3 per cent from the trend.

These two crises shared three characteristics. First, the disruption in oil supplies occurred at a time when the world economy was expanding at a rapid rate. The quick economic growth stimulated greater use of petroleum. Second, both disruptions occurred when the world's crude oil capacity was being stretched to the limit. Third, each crisis took place at a time when investment in oil and gas exploration had tapered off, making it impossible to achieve a speedy increase in non-Opec output.

The global oil picture is starting to look like the early 1970s which set the scene for the 1973 and 1979 oil crises. The conditions for a third oil crisis are today in place. First, world oil consumption is growing rapidly at more than 2 per cent per annum, boosted by strong economic growth and is projected to continue expanding. Second, Opec will be operating at or near capacity by the third quarter of this year with one member (Iraq) signalling its intention to cut production by October this year if its demands are not met. Very small increases in non-Opec production are expected. Finally, investor excitement over technology stocks has depressed oil equities. Consequently, oil companies are limiting investment, preferring instead to buy back stocks.

If the past is a guide, one can expect turmoil in the oil market in the autumn of this year. The turmoil can be expected to last until 2002 or 2003 in the absence of an economic slowdown (which would temper consumption growth) or the timely use of strategic stocks by consuming countries.

It must also be noted that the situation will remain tight for the next two to three years should the world be lucky enough to avoid its third oil crisis in 2000. The world oil production capacity has remained static or even declined while consumption has been increasing. This trend continues even though costs of exploration and production are dropping rapidly.

Global oil inventories today are at minimum levels as a result of production cutbacks by Opec and, therefore, will not be able to play their traditional role as a source of supply during the autumn of this year and winter of 2001. Indeed, absent a recession, stocks may not be able to play a role as a source of supply for several years because Opec cutbacks have essentially drained the world of most of its available commercial holdings. Thus, in the current circumstances, Opec must produce roughly 30 million barrels a day (mbd) in the fourth quarter of this year to maintain a supply-and-demand balance under the current level of stocks.

Yet, according to estimates of Opec productive capacity, an output level of 30 mbd may either be beyond the organisation's reach or, if it is feasible, only achievable with production from Iraq. Opec's current sustainable capacity stands at 29.4 mbd.

However, Iraq's Oil Minister, Amir Rasheed has already let it be known that Iraq intends to ramp up its oil production by about 1 mbd by the end of this year to curry favour with the United States. But if Washington does not play ball in reaching a compromise on the implementation of a UN resolution that would permit foreign investment in the Iraqi oil sector, Iraq will shut down production, depriving the oil markets of at least 2.4 mbd.

At the same time, the other Opec members will be unable to counteract a decision by Iraq to cut production this autumn because they lack sufficient capacity to meet the projected 30-mbd requirement. Thus, the world will be left with a gap of 1 mbd to 2.5 mbd between the projected demand and world production capacity if that Iraq follows through its promise to reduce output around the first of October this year. The cut will trigger a price escalation, just as the one in 1979 did.

Despite the obvious benefits afforded by the "New Economy" to the major industrialised nations and the fact that oil represents now a smaller share of GDP among the OECD countries, higher oil prices still matter to the global economy. The increase in oil prices since March 1999 ranks second in absolute terms among the three disruptions that have occurred since 1973. The price increase following the Arab Embargo in 1973 raised consumer payments for oil by roughly $150 billion. By contrast, the price boost imposed by Opec in March 1999 will raise consumer expenditures by $480 billion. (The all-time record was established between 1978 and 1979, when consumer expenditures were increased by more than half a trillion dollars).

The message of this article is quite simple. The world may be entering its the third oil crisis. Consumption is increasing rapidly. Crude oil production capacity is being pushed to the limit. Private investment in exploration and production is increasing at a very modest rate. And, Iraq has recognised that it will have the opportunity to squeeze the market as early as October 2000 if its demand for the lifting of the UN sanctions against it is not met. A crisis similar to the disruptions of 1973 and 1979 could be months away.

However, the crisis, should it occur, will have much more modest impact on the global economy than the previous crises unless the price of oil rises above $50/b. With oil, anything is possible.

The writer is a UK-based international oil expert, a consultant to the World Bank in Washington D.C. and a technical expert of the United Nations Industrial Development Organisation (UNIDO) in Vienna. He is Director of the Oil Market Consultancy Service in the UK and a member of the International Institute for Strategic Studies (IISS) in London

http://denver.petroleumplace.com/egatecom/scream/2000/06/29/eng-middleeastwire/eng-middleeastwire_000042_217_522211924661.html

-- Cave Man (caves@are.us), June 30, 2000

Answers

Thus, in the current circumstances, Opec must produce roughly 30 million barrels a day (mbd) in the fourth quarter of this year to maintain a supply-and-demand balance under the current level of stocks.

Yet, according to estimates of Opec productive capacity, an output level of 30 mbd may either be beyond the organisation's reach or, if it is feasible, only achievable with production from Iraq. Opec's current sustainable capacity stands at 29.4 mbd.

No room for error. Looks like we're bumping into peak production.

-- Cave Man (caves@are.us), June 30, 2000.

Cave Man, are you tuned into the energryresources or RunningOnEmpty e-groups? Both of them deal with the coming end of cheap oil. I think you can contact them through www.dieoff.com or www.hubbertpeak.com.

BTW, have you noticed a curious public lethargy about the oil situation lately? I've posted a couple of stories to my local daily newspaper discussion board and seen little or no response. Even the story in the June 26 USA Today about heating oil shortages this coming winter didn't stir a murmur, and I'm in the heart of heating-oil territory. The article itself never saw the light of day in the local papers. The only story in the local daily paper was a buried three-paragraph item in the back of the second section about one of our US Senators expressing "concern".

Oh well, it's summer, and who cares if gasoline is $1.65 to $2.50 a gallon. Maybe people will start taking notice in the fall. You think?

-- Cash (cash@andcarry.com), June 30, 2000.

Cash,

" BTW, have you noticed a curious public lethargy about the oil situation lately?"

Yes, very much so, heating oil and natural gas are not very sexy stories. People pretty much think the "crisis" is contrived and will go away shortly. The main stream press, outside of quoting prices, does a lousy job of reporting on this subject. Right now there is substantial imperical evidence that we are hitting peak production, a monumental milestone in history of civilization. Yawn.

-- Cave Man (caves@are.us), June 30, 2000.

burned out by y2k=hoax?? the boy,cried wolf,wolf, when there was no wolf.BUT when the wolf was real,no-one BELIEVED.=WOLF GET,S BIG MEAL. same analogy to un-belief in prophecy!!

-- al-d. (dogs@zianet.com), June 30, 2000.

During the first "oil crises" the public considered it their individual social responsibility to contribute to the conservation of oil, during the second one, it was financially expedient for the public to do so. Now with the economy doing so well and the "me" generation attitude of~let someone else conserve as long as I get all I want, it doesn't look like too many are interested in making the effort to decrease their individual consumption. After all, it is a constitutional right for every 16 year old to get a new car, making that 5 or 6 cars in the family driveway.

Car pool? Are you out of your mind? That uncool! High school parking lots should be required to provide a parking space for every student old enough to get a license. (and those who don't bother)

So what if Mom's SUV is a gas hog and gets around pollution standards, Dad's sports car is a necessity, his ego demands one at this time in his life, and older brother's six pack, with monster wheels and the bed jacked up high enough to ensure the headlights shining in the morons car in front of him, blinds the driver. And clean!!! Not a scratch or a speck of dust on that hummer!!! No not HIS pickup! His pride and joy wasn't made for working!!! After all the "family" is doing what feels good to them, why should they change? Leave that to the lesser people, the parasites of society earning minimum wage who are always complaining that they cannot afford the basics.

Why should Junior worry? He has 4 years of parties and sports to get through so he can get squeak through college that Mom and Dad are paying for.

Good thing money determines who goes to college instead of potential and ability, there wouldn't be enough people to do minimum wage jobs, after all, Sister and Brother would never stoop so low as to do that kind of work themselves.

Fuel shortage? High prices? Who cares as long as I get all I want.

-- Cherri (sams@brigadoon.com), June 30, 2000.

By Jim Washer Bridge News London--Jun 30

OPEC oil production fell to 28.2 million barrels per day in June, down roughly 100,000 bpd from a revised May figure of 28.3 million bpd, preliminary assessments from Geneva-based consultants Petrologistics show, a source familiar with the data said Friday. * * * The decline was mainly attributable to a reduction in production from Agip's Brass River crude oil stream in Nigeria, the source said. A fire in a pipeline serving the Brass River crude terminal had restricted exports by around 100,000 bpd from May 17 to around June 13. Production from most other OPEC members appeared broadly unchanged in June from May, according to the preliminary data, the source said. BridgeNews' own survey of OPEC oil production estimated the cartel's output at 28.03 million bpd in May, up 330,000 bpd from 27.70 million bpd in April.

http://www.petroleumworld.com/

-- Cave Man (caves@are.us), June 30, 2000.

HELLO. DOOMZIES.

A HAPPY MEAL COSTS MORE THAN A GALLON OF GAS.

-- cpr (buytexas@swbell.net), June 30, 2000.

It is amazing to me that humanity, which has based its existence on cheap and abundant crude oil, is ignoring the imminent peak in conventional oil production.

This isn't going to end well.

DS

-- Sure M. Hopeful (Hopeful@future.com), June 30, 2000.

"A HAPPY MEAL COSTS MORE THAN A GALLON OF GAS."

I tried happy meals in my car, but it ran like shit. Made a lot of shit too.

Kinda reminds me of that CPR guy... shit for brains.

-- (chuckie@the.shithead), June 30, 2000.