Fear Could Trigger Oil Shortages, Experts Say

Lou Bacca’s no soldier, but he’s preparing for war.

Not that the Santa Ana Chevron dealer expects any Persian Gulf hostilities to disrupt his supply of gasoline. But just in case: He’s prepared to cut his opening time from 24 hours to only a few hours during the morning rush. He’s even plotted where on his lot the gas lines will start.

“If you’re in business and you haven’t planned, you better,” said Bacca, a veteran of the gas lines, price hikes and fuel shortages of the 1970s.

Bacca’s not alone in girding for a gulf conflict that threatens to disrupt the world’s oil lifeline if Iraq doesn’t pull out of Kuwait by the U.N.-sanctioned deadline today.

No one can say with certainty whether a war would seriously imperil oil supplies--or how that would, in turn, affect prices and the availability of fuel here. And some analysts fear the long-term political instability that would result from a war.

“Nobody knows what will happen, and anyone who says they have any comprehension of what will happen in the first three days is either clairvoyant or doesn’t know that they don’t know what they’re talking about,” said Philip K. Verleger Jr., an economist and senior fellow at the Institute for International Economics in Washington.

Still, analysts agree that if war comes, merely the fear of shortages will drive prices higher--from their current $27 a barrel to as much as $45 to $60 or higher in the first day or two of war.

If passed through completely, every $1 hike in the price of crude oil would translate into a 2.4-cent-a-gallon increase at the gasoline pump.

And although many military analysts doubt that a war would result in serious damage to gulf oil installations, a number of steps are being taken around the world to ensure that oil continues to flow once bullets start to fly. Oil company and government officials have offered repeated assurances that the world’s oil supply would be safe, even if a war breaks out this week.

For now, everyone agrees that there is more oil on hand than before the gulf crisis began with Iraq’s invasion of Kuwait on Aug. 2--even with the loss of 4.3 million barrels a day of Iraqi and Kuwaiti crude oil under a United Nations embargo.

The International Energy Agency said last week that oil stocks of the 24 industrialized nations totaled 3.6 billion barrels at the beginning of the year, 3.4% higher than a year earlier and close to the peak of 1981. That’s about 98 days’ supply at the nations’ 1989 consumption rate.

At the same time, demand has been falling. In all of 1990, U.S. demand for oil dropped for the first time in seven years, partly due to the gulf crisis.

But there is precious little room for additional production, and that’s where the uncertainty comes in. If Iraqi President Saddam Hussein is able to carry out even part of his threat to disable Saudi oil installations, it could affect world supplies.

If Saudi Arabia closes down some of its northern oil operations near the war zone, as expected, that could remove as much as 2 million barrels of production from world supplies, analysts added.

And if tanker operators decide not to enter the gulf, that could seriously cut the flow of precious crude oil to Western markets, at least for a short time. More than 10 million barrels of oil a day is transported out of the gulf, estimated Petroleum Intelligence Weekly, an industry newsletter.

Already, shipping insurance rates have skyrocketed for gulf-bound tankers, and while charters continue to be booked after Jan. 15, it is unlikely tankers will “lift” crude from gulf ports for several days after a war breaks out, shipping brokers said.

To forestall the worst, several steps are being taken:

* In the event of war, the International Energy Agency said Friday, its member nations would release oil from strategic petroleum reserves and cut demand for oil, with the net effect of boosting world supplies by 2.5 million barrels a day.

* The U.S. Energy Department has said it too would release reserves but would not say how much or how soon. The 586-million barrel Strategic Petroleum Reserve has the ability to deliver as much as 3.5 million barrels of oil a day.

* Saudi Arabia and Iran, which have boosted oil production to near capacity to make up for oil lost under the U.N. embargo, have been shipping crude oil out of the gulf into “floating storage” or onshore tanks. As much as 100 million barrels of such oil should be ready to be delivered if war breaks out, analysts said.

* The Saudis are also making contingency plans to boost shipments of oil--to 3 million barrels from 1 million per day--through the east-west Petroline pipeline to the Red Sea port of Yanbu, out of range of any fighting, analysts said. Other reports say the Saudis are considering a service to shuttle oil from gulf ports near the war zone to tankers waiting farther south, out of range of Iraqi missiles.

* It is likely that the Saudis would shut down production from their Safaniya and nearby oil fields, within 50 miles of the Kuwaiti border, the PIW reported last week. Similarly, Japan’s Arabian Oil Co. has plans to evacuate workers and shut down its own production of 300,000 barrels of crude oil a day from the Neutral Zone between Saudi Arabia and Kuwait, the newsletter added.

Meanwhile, economists, government officials and oil company chief executives are trying to reassure the public that war will not threaten overall world supplies, apparently in an attempt to calm jittery nerves on oil markets.

It’s doubtful, however, that such assurances will keep prices from shooting upward, at least at first. Recent events show that oil markets are highly volatile.

Nervous traders along the industry supply line--from producers to refiners to gas stations to motorists--are likely to hoard crude or refined products in the initial days of a war, said Ed Rothschild, director of energy policy for the consumer group Citizen Action in Washington. And that alone could drive prices up.

Once it’s clear where a military operation is headed, however, oil prices could head south in a hurry, provided that terrorists don’t disrupt production in the gulf or elsewhere.

Short of such terrorism, military analysts doubt Iraq will succeed in seriously damaging gulf oil facilities.

Most of Saudi Arabia’s oil fields and other installations are within 300 miles of the Kuwaiti border and within range of Iraqi jets. Besides oil wells, the likeliest targets for military action are pipelines, storage tanks, refineries and marine terminals, said Richard Golob, publisher of Golob’s Oil Pollution Bulletin in Massachusetts. Tankers and offshore platforms are also likely targets, he said.

Iraq’s actions during the eight-year war with Iran provide a precedent for attacks, Golob said. Iraqi jets were able to strike repeatedly at Iran’s terminal on Kharg Island, as well as to damage hundreds of oil tankers.

In addition, jets, helicopters and ships were successful in bombarding Iranian oil installations both inland and on the coast, including those on Larak Island at the southern end of the Persian Gulf near the Strait of Hormuz, Golob said. Offshore platforms proved most vulnerable during that war.

Refineries could also provide attractive targets, since they have a tendency to blow up if damaged. Kuwait has four major refineries in range of Iraqi jets, and Saudi Arabia has two major ones, including the world’s largest refinery at Ras Tanura and a second at Jubail. Other nations similarly have refineries within reach, with their attendant pipelines and oil storage tanks, Golob said.

Still, oil wells and pipelines make small targets, particularly for notoriously inaccurate Iraqi Scud missiles.

Unlike Iran’s relatively poorly defended oil facilities, Saudi installations will be defended by the combined might of the U.S. Air Force and Navy, aided by AWACS radar planes and Patriot air defense missiles.

“Superior air power cuts down on Iraqi missiles or airplanes getting through, plus ground forces of Iraqi armor are not going to be taken out of their defensive positions,” said Joseph Story, an industry consultant in Washington. “If a few missiles get through and hit Saudi fields, they’ll have to be very lucky to hit something important and cause a severe supply disruption.”

In gulf shipping lanes, even though the U.S. Navy so far has not given assurances that it will protect gulf shipping, “with the 55 U.S. warships, state-of-the-art British minesweepers and the rest of the multinational naval force already on patrol in the gulf, some say there might not be a safer time to be there,” said PIW.

The real damage to world oil markets could come after the shooting stops, said Henry Schuler, director of the energy security program at the Center for Strategic and International Studies in Washington. “The real consequences of resorting to war out there on the oil is the radicalization and destabilization of the entire area that will follow, and that could have very long-term adverse consequences,” Schuler said.

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The Price of Oil Every 15 Minutes For February delivery, in dollars per 42-gallon barrel Friday Close: $27.29 Monday Close: $30.78, up $3.49 Source: New York Mercantile Exchange via Associated Press Oil in the Gulf Refineries in the region Saudi Arabia 1 Ras Tanura 2 Jidda 3 Juball 4 Riyadh 5 Yanbu 6 Ras al Khafji Iraq 7 Bassra 8 Dura 9 K3-Haditha 10 Khanaqin 11 Kirkuk 12 Baiji 13 Mufthia 14 Qaiyarah, Mosul Kuwait 15 Shuaiba 16 Mina al Zour 17 Mina Abdulla 18 Mina al-Ahmadi United Arab Emirates 19 Ruwais 20 Umm al Nar Bahrain 21 Awall Oman 22 Mina al Fahal Qatar 23 Umm Said Yemen 24 Aden 25 marib Iran 26 Esfahan 27 Shiraz 28 Tabriz 29 Tehran Jordan 30 Zerka Lebanon 31 Tripoli 32 Sidon Syria 33 Banias 34 Homs Turkey 35 Aliaga-Izmir 36 Batman 37 Izmit 38 Mersin Source: International Petroleum Encyclopedia, 1989/ Los Angeles Times