Higher Prices for Gasoline Due in Weeks


Oil prices soared Thursday on word of Iraq's invasion of Kuwait, heightening fears of a 1970s-style oil shut-off, possible shortages and price peaks. Consumers can expect to see higher gasoline prices within weeks.

Some industry economists and analysts played down the long-term effects, arguing that--unlike in the 1970s--world supplies of oil are abundant. Less than 10% of the United States' oil imports come from Iraq and Kuwait combined, an amount that is substantial but could be made up elsewhere.

Nevertheless, other analysts said prices will remain high now that the invasion has underscored a shift in power within the Organization of Petroleum Exporting Countries, which controls 76% of the world's oil reserves--away from the "price doves" led by Saudi Arabia and toward the aggressive "price hawks" led by Iraq.

That would mean the end of an era of moderate oil prices, bulging inventories and routine production quota violations by oil nations. "We now have a new OPEC," said oil futures trader Peter Beutel with Merrill Lynch Futures in New York.

Iraq moved troops into tiny but oil-rich Kuwait early Thursday, culminating a feud over territories, debt repayments and oil production.

On Thursday, the September contract price for the benchmark grade of U.S. crude oil, West Texas Intermediate, shot up $1.57 per barrel to $23.11 in trading on the New York Mercantile Exchange. The same contract had traded for as little as $15.06 in June.

If the higher price of crude oil is passed on to the consumer, U.S. motorists can expect gasoline prices to jump 2 to 5 cents a gallon for every $1 hike in crude prices.

But it is an open question whether prices will remain at Thursday's levels. The price hikes reflected "knee-jerk" market psychology more than any real shortages or disruptions, Beutel said.

In the first five months of 1990, the United States imported 610,000 barrels of oil and petroleum products a day from Iraq, nearly 8% of net imports and 3.5% of total U.S. consumption, the Energy Department reported. That made Iraq the sixth-largest supplier of oil to the United States. In the same period, the United States imported 120,000 barrels a day from Kuwait, a little more than 1% of net imports.

Meanwhile, commercial U.S. inventories of crude oil bulged at about 386 million barrels as of last Friday, their highest level since 1982, according to the American Petroleum Institute, the industry's main trade group. In addition, the government's Strategic Petroleum Reserve has nearly 590 million barrels--a 75-day supply--intended for use in an emergency, the Energy Department reported.

But in the longer term, how will prices and supplies react now that Iraq has invaded Kuwait? Under the most optimistic scenario:

Iraq will withdraw from Kuwait shortly, perhaps within a week, after installing a puppet government, and Kuwaiti oil shipments will resume after a brief cutoff.

Iraqi oil shipments, which the United States now refuses to import, will find willing buyers elsewhere in the world, and there will be little net effect on world oil markets or supplies.

Oil prices, which have risen sharply in the last two days because of Iraq-Kuwait tensions and the subsequent invasion, will return to more normal levels, around $20 or $21 per barrel.

But it is still too early to tell if that scenario will play out.

Indeed, prices could shoot up dramatically if other nations join the United States in any prolonged embargo of imports from Iraq and Kuwait, effectively reducing the amount of oil on world markets by up to 4.5 million barrels per day.

Other OPEC nations would be hard-pressed to make up the difference. The world has only about 4 million barrels per day of excess production capacity, and about half of that is in Saudi Arabia.

And it is questionable whether Saudi Arabia--even with U.S. backing--would be willing to crank up its production, knowing that a hostile Iraq sits on its northern border.

In the worst case, analysts said, prices could skyrocket to $30 or $40 per barrel, disrupting the economies of industrialized nations, particularly Japan and the countries of Western Europe, which are far more dependent on Persian Gulf oil than the United States is.

Overall, Iraq produced an average of about 2.84 million barrels of crude and petroleum liquids per day in 1989, and Kuwait produced about 1.9 million barrels per day, the Energy Department said. About 1.3 million barrels of the combined total went to Western Europe and 680,000 barrels to Japan.

But the United States would also suffer shortages or higher prices, relying on imports for more than half of its oil supply.

Whatever happens, oil prices are likely to remain high for the foreseeable future, as Iraq emerges as a powerful force in a realigned OPEC that favors strong prices and quick revenues over longer-term goals such as amicable relations with consuming nations.

The most sobering fact to emerge from the invasion is that it puts Iraq in control of about 190 million barrels of oil reserves--its own and Kuwait's combined. That is about 20% of the world's total and rivals the reserves of OPEC leader Saudi Arabia, which has 255 million barrels.

It also puts Iraq's hands on the oil spigot of Kuwait, which has been one of the cartel's chronic over-producers. Production above national quotas set by OPEC is the main reason that the cartel failed to push prices up to its previous target price of $18 per barrel. Iraq seems certain to hold down Kuwaiti production to force prices up.

Analysts believe OPEC is now more likely to keep the price of crude at its new target price of $21 per barrel, and it is possible, they added, that it will reach Iraq's previously stated goal of $25 by the end of the year.

For the Record Los Angeles Times Saturday August 4, 1990 Home Edition Part A Page 2 Column 1 National Desk 2 inches; 41 words Type of Material: Correction Oil reserves--An article in Friday's editions incorrectly stated the amount of oil reserves held by Kuwait, Iraq and Saudi Arabia, putting them in terms of millions of barrels. In fact, Iraq and Kuwait both hold about 190 billion barrels of oil reserves; Saudi Arabia has 255 billion barrels.
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