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John Sununu White House Office Files
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Originally Processed With FOIA(s):
FOIA Number:
1998-0004-F[1]
S
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the George Bush Presidential
Library Staff.
Record Group/Collection:
George H.W. Bush Presidential Records
Collection/Office of Origin:
Chief of Staff, White House Office of
Series:
Sununu, John, Files
Subseries:
White House Offices Files
OA/ID Number:
29185
Folder ID Number:
29185-001
Folder Title:
Staff Secretary (Cicconi) (1990)
Stack:
Row:
Section:
Shelf:
Position:
G
15
25
6
2
U.S. Department of
Transportation
GENERAL COUNSEL
400 Seventh St., S.W.
Office of the Secretary
Washington, D.C. 20590
of Transportation
December 14, 1990
The Honorable John H. Sununu
THE CHIEF of STAFF
Chief of Staff to the President
has seen
The White House
Washington, D.C. 20500
Dear Governor Sununu:
Thank you for the opportunity you afforded me
yesterday to discuss the upcoming vacancy on
your staff. I was honored to be included
among those viewed as potential candidates.
As Andy may have already advised you, I am
very much interested in pursuing that
potential, and I would be committed to meeting
your expectations and those of the President
as you identified them during our meeting.
Again, thank you for your consideration.
Sincerely,
This
Phillip D. Brady
P.S. Please find attached a copy of the Post
story I referenced during our meeting on
Marlin's very understandable reaction to
lawyers
A
THE WHITE house
May WASHINGTON 16, 199THE CHIEF of STAFF
has seen
TO: CHIEF OF STAFF
Attached are the two submissions
for aid to Panama and Nicaragua.
They went to the Hill on February 6
and March 13 respectively.
Let me know if you need further info
on this.
Also, FYI, I've been holding the
DC abortion information you asked
for since the matter looks like it may
be resolved. If you want it, though,
I can forward to you immediately.
Jim Cicconi
ENCLOSED
To: Hill
Date: 2/6/90
THE WHITE HOUSE
Time: 300
WASHINGTON
Panama
February 6, 1990
The Speaker of the
House of Representatives
Sir:
I ask the Congress to consider requests for supplemental
appropriations for fiscal year 1990 in the amount of $500,000,000
for the Economic Support Fund and $70,000,000 for the Department
of State, as well as supplemental appropriations language for the
U.S. Governor of the International Bank for Reconstruction and
Development. In addition, I am concurrently sending the Congress
a special message reporting a set of deferrals of certain
Department of Defense obligations. The budget authority for the
supplementals would be fully offset by transfers I am proposing.
The associated outlays would also be fully offset by the
transfers and the deferrals.
The details of these proposals are set forth in the enclosed
letter from the Director of the Office of Management and Budget.
I concur with his comments and observations.
Sincerely yours,
CyBal
Enclosures
Estimate No.
1
101st Congress, 1st Session
EXECUTIVE OFFICE OF THE PRESIDENT
STATE LIMITED OFFICE
OFFICE OF management AND budget
WASHINGTON, D.C. 20503
THE DIRECTOR
February 6, 1990
The President
The White House
Sir:
Attached for your consideration are requests for
supplemental appropriations for fiscal year 1990 in the
amount of $500,000,000 for the Economic Support Fund and
$70,000,000 for the Department of State. The purpose of the
request for the Economic Support Fund is to provide the
economic assistance to Panama that you announced on
January 19, 1990. The purpose of the request for the
Department of State is to provide for an increase in the
number of refugees admitted to the United States, as well as
to fund high priority assistance requirements for some 14
million refugees worldwide.
The budget authority and outlays for these requests
would be offset by transfers and deferrals of certain
Department of Defense obligations. A table is enclosed with
this letter that shows the cost of the supplemental requests
and the savings associated with the transfers and deferrals.
Also included for your consideration is a request for FY
1990 supplemental appropriations language for the U.S.
Governor of the International Bank for Reconstruction and
Development. This proposal would allow the U.S. to keep its
1988 agreement to purchase shares in a general capital
increase of the Bank. This language does not affect budget
authority.
We have carefully reviewed the requests contained in
this document and are satisfied that they are necessary at
this time. We recommend, therefore, that they be
transmitted to Congress.
Respectfully yours,
Imm G. Danna
Richard G. Darman
Director
Enclosures
PANAMA SUPPLEMENTAL APPROPRIATION LANGUAGE
of the funds available to the Department of Defense in
fiscal year 1990, not to exceed $500,000,000 may be
transferred to and be merged with, funds appropriated to
the President under the heading "Economic Support Fund"
to be available for the same purposes and the same time
period as funds appropriated for the Fund: Provided,
That, the amounts transferred shall be from the
following appropriations in not to exceed the following
amounts: "National Defense Stockpile Transaction Fund",
$216,800,000; "Family Housing Construction, Air Force",
1989/93, $8,000,000; "Family Housing Construction, Air
Force", 1990/94, $17,800,000; "Military Construction,
Defense Agencies", 1990/94, $21,000,000; "Missile
Procurement, Air Force", 1989/91, $49,802,000;
"Research, Development, Test, and Evaluation, Army",
1989/90, $10,000,000; "Defense Production Act
Purchases", $13,000,000; "Research, Development, Test,
and Evaluation, Defense Agencies", 1989/90, $44,500,000;
"Research, Development, Test, and Evaluation, Navy",
1990/91, $14,598,000; "Research, Development, Test, and
Evaluation, Navy", 1989/90, $5,000,000; "Research,
Development, Test, and Evaluation, Air Force", 1989/90,
$19,900,000; "Other Procurement, Navy", 1988/90,
$16,500,000; "Weapons Procurement, Navy", 1989/91,
$40,600,000; "Other Procurement, Army", 1988/90,
$22,500,000: Provided further, That, Section 8115(a) of
the Department of Defense Appropriations Act, 1988
(Public Law 100-202; 101 Stat 1329-82), is amended by
striking out "90,895,000" and inserting in lieu thereof
"$68,395,000".
This request would provide $500 million to help Panama improve
its relations with the International Financial Institutions, for
balance of payments support and business credit, for a public
investment program, for public sector restructuring and for
development support. The largest component of this program
consists of restocking of inventory, replenishment of capital
equipment, and economic reactivation. This assistance would
focus on encouraging economic policy reform.
DEPARTMENT OF STATE
OTHER
Migration and Refugee Assistance
For an additional amount for "Migration and refugee
assistance", $70,000,000, which is to be derived by transfer
from the "National Defense Stockpile Transaction Fund".
This request would support the authorized fiscal year 1990
worldwide refugee admissions ceiling of 111,000 persons. This is
an increase of 27,000 admissions over the budgeted ceiling. In
addition, it would cover high priority assistance requirements
for some 14 million refugees worldwide.
Both of these proposals would be fully offset by transfers of
budget authority. Outlays would be offset by a group of
Department of Defense deferrals that is part of this package.
FUNDS APPROPRIATED TO THE PRESIDENT
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
Limitation on Callable Capital Subscriptions
The United State Governor of the International Bank for
Reconstruction and Development may subscribe without fiscal year
limitation to the callable capital portion of the United States
share of increases in capital stock in an amount not to exceed
$1,609,671,408.
The purpose of this language is to allow the purchase of
callable capital in the International Bank for Reconstruction and
Development (IBRD). Callable capital serves as a guarantee
provided in the form of a program limitation. Outlays would only
be incurred in the event of a call by the IBRD. In 1988, the
United States agreed to purchase shares in a general capital
increase (GCI) of the IBRD. The purchase of each IBRD GCI share
requires a fixed proportion of paid-in capital (3 percent) and
callable capital (97 percent). The Foreign Operations, Export
Financing, and Related Appropriations Act, 1990 (P.L. 101-167)
provided $49,785,792 in budget authority for the paid-in portion
of such shares, but did not provide the callable capital
component of $1,609,671,408 required to purchase the shares.
THE WHITE HOUSE
Office of the Press Secretary
(Fort Irwin, California)
For Immediate Release
February 6, 1990
The President today is transmitting to Congress a $570 million
package of FY 1990 supplementals that includes the following:
-- $500 million for increased aid to Panama, as announced by the
President on January 19th;
--$70 million for increased refugee assistance;
--appropriations language that would allow the United States
Governor of the International Bank for Reconstruction and
Development to purchase shares in a general capital increase of
the Bank.
The budget authority and outlays for these requests would be
fully offset by transfers and deferrals from the Department of
Defense.
# # #
Nicaragua
THE WHITE HOUSE
WASHINGTON
March 13, 1990
The Speaker of the
House of Representatives
Sir:
I ask the Congress to consider a request for supplemental
appropriations for fiscal year 1990 in the amount of $300,000,000
for the Economic Support Fund. This request is the third and
final element of the supplemental package for which I am
requesting Congressional approval by April 5th. Requests for
$500 million for Panama and $70 million for Refugee Assistance,
the two other elements, have already been transmitted to
Congress.
The budget authority for the supplemental would be fully
offset by new transfers I am proposing. The associated outlays
would also be fully offset by the transfers and by outlay savings
associated with Department of Defense deferrals transmitted in
the Special Message of February 6, 1990 that go beyond those
needed to offset the supplemental requests for Panama and Refugee
Assistance.
The details of this proposal are set forth in the enclosed
letter from the Director of the Office of Management and Budget.
I concur with his comments and observations.
Sincerely yours,
G Bl
Enclosures
Estimate No.
2
101st Congress, 1st Session
PTR PRESIDENT STATE UNITED
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND budget
WASHINGTON, D.C. 20503
THE DIRECTOR
March 13, 1990
The President
The White House
Sir:
We are submitting for your consideration a request for
supplemental appropriations for fiscal year 1990 in the amount of
$300,000,000 for the Economic Support Fund. The purpose of this
request is to provide the economic assistance to Nicaragua that
you announced today. This request is the third and final element
of the supplemental package for which you requested Congressional
approval by April 5th. Requests for $500 million for Panama and
$70 million for Refugee Assistance, the two other elements, have
already been transmitted to Congress.
The budget authority for this supplemental would be fully
offset by proposed transfers from the Department of Defense.
The associated outlays would also be fully offset by the
transfers and by outlay savings associated with Department of
Defense deferrals transmitted in the Special Message of February
6, 1990 that go beyond those needed to offset the supplemental
requests for Panama and Refugee Assistance. A table is enclosed
with this letter that displays the cost of the supplemental
request and the savings associated with the transfers and
deferrals.
We have carefully reviewed the proposal contained in this
document and are satisfied that this request is necessary at this
time. We recommend, therefore, that it be transmitted to
Congress.
Respectfully yours,
Them G. Danna
Richard G. Darman
Director
Enclosures
NICARAGUA SUPPLEMENTAL APPROPRIATIONS LANGUAGE
of the funds available to the Department of Defense in fiscal
year 1990, not to exceed $300,000,000 may be transferred to and
merged with, funds appropriated to the President under the
heading "Economic Support Fund" to be available for the same
purposes and the same time period as funds appropriated for the
Fund: Provided, That the amounts transferred shall be from the
following appropriations in not to exceed the following amounts:
"Operation and Maintenance, Army", $23,305,000; "Operation and
Maintenance, Navy", $38,834,000; "Operation and Maintenance,
Marine Corps", $1,582,000; "Operation and Maintenance, Air
Force", $16,528,000; "Operation and Maintenance, Defense
Agencies", $7,132,000; "Operation and Maintenance, Army Reserve",
$896,000; "Operation and Maintenance, Navy Reserve", $209,000;
"Operation and Maintenance, Air Force Reserve", $1,190,000;
"Operation and Maintenance, Army National Guard", $2,125,000;
"Operation and Maintenance, Air National Guard", $2,199,000;
"Aircraft Procurement, Air Force", 1990/1992, $69,115,000;
"Research, Development, Test and Evaluation, Navy", 1990/1991,
$38,100,000; "Military Construction, Army", 1990/1994,
$31,070,000; "Military Construction, Navy", 1990/1994,
$10,000,000; "Military Construction, Air Force", 1990/1994,
$25,942,000; "Military Construction, Defense Agencies",
1990/1994, $4,810,000; "Military Construction, Army National
Guard", $9,063,000; and of the amount to be obligated only for
the procurement of 20 Mobile Armed Reconnaissance Vehicles from
"Other Procurement, Air Force", 1989/1991, $17,900,000.
This request would provide $300 million for economic assistance
for Nicaragua to finance: 1) urgently needed imports of
agricultural supplies and petroleum for spring planting and to
prevent stoppage of transportation and other activities that
depend on oil; 2) the return of refugees to Nicaragua; 3)
emergency employment and medical programs; 4) resumption of
development assistance programs; and 5) efforts to put
Nicaragua's relations with the international financial
institutions on a business-like basis.
This proposal would be fully offset by budget authority transfers
from the Department of Defense. Outlays would be offset by
outlay savings from the proposed budget authority transfers and
by outlay savings associated with Department of Defense deferrals
transmitted in the Special Message of February 6, 1990 that go
beyond those needed to offset the supplemental requests for
Panama and Refugee Assistance.
Offsetting Transfers and Deferrals
(in millions of dollars)
1990
1991
1992
1993
1994
1995
Budget Authority
Aid to Nicaragua
300.0
---
---
---
---
---
Aid to Panama
500.0
---
---
---
---
---
Refugee Assistance
70.0
---
---
---
---
---
Defense transfers
Nicaragua
-300.0
---
---
---
---
---
Panama and Refugee
Assistance
-570.0
---
---
---
---
---
Defense deferrals
---
---
---
---
---
---
Net budget authority
change
---
---
---
---
---
---
Outlays
Aid to Nicaragua
195.0
70.0
12.0
8.0
5.0
3.0
Panama
300.0
150.0
50.0
---
---
---
Refugee Assistance
52.5
14.0
3.5
---
---
---
Defense transfers
Nicaragua
-125.9
-85.0
-50.4
-18.8
-10.9
-4.1
Panama and Refugee
Assistance
-79.8
-87.2
-55.4
-25.5
-9.2
-6.3
Defense deferrals
-344.9
-178.0
23.0
350.6
55.0
78.0
Net outlay change
-3.1
-116.2
-17.3
314.3
39.9
70.6
Withdrawal/Redaction Sheet
(George Bush Library)
Document No.
Subject/Title of Document
Date
Restriction
Class.
and Type
01. Letter
From James Cicconi to John Sununu
9/12/90
P/S
Re: Paper prepared by Bill Martin (1 pp.)
Collection:
Record Group:
Bush Presidential Records
Office:
Chief of Staff to the President, Office of the
Series:
Sununu, John, Files
Open on Expiration of PRA
Subseries:
White House Offices File
(Document Follows)
WHORM Cat.:
By IP (NLGB) on 10/28/05
File Location:
Staff Secretary
(Cicconi) (1990)
Date Closed:
12/16/2004
OA/ID Number:
29185-001
FOIA/SYS Case #:
1998-0004-F[1]
Appeal Case #:
Re-review Case #:
2005-0426-S
Appeal Disposition:
P-2/P-5 Review Case #:
Disposition Date:
AR Case #:
MR Case #:
AR Disposition:
MR Disposition:
AR Disposition Date:
MR Disposition Date:
RESTRICTION CODES
Presidential Records Act - [44 U.S.C. 2204(a)]
Freedom of Information Act - [5 U.S.C. 552(b)]
P-1 National Security Classified Information [(a)(1) of the PRA]
(b)(1) National security classified information [(b)(1) of the FOIA]
P-2 Relating to the appointment to Federal office [(a)(2) of the PRA]
(b)(2) Release would disclose internal personnel rules and practices of an
P-3 Release would violate a Federal statute [(a)(3) of the PRA]
agency [(b)(2) of the FOIA]
P-4 Release would disclose trade secrets or confidential commercial or
(b)(3) Release would violate a Federal statute [(b)(3) of the FOIA]
financial information [(a)(4) of the PRA]
(b)(4) Release would disclose trade secrets or confidential or financial
P-5 Release would disclose confidential advice between the President
information [(b)(4) of the FOIA]
and his advisors, or between such advisors [a)(5) of the PRA]
(b)(6) Release would constitute a clearly unwarranted invasion of
P-6 Release would constitute a clearly unwarranted invasion of
personal privacy [(b)(6) of the FOIA]
personal privacy [(a)(6) of the PRA]
(b)(7) Release would disclose information compiled for law enforcement
purposes [(b)(7) of the FOIA]
C. Closed in accordance with restrictions contained in donor's deed of
(b)(8) Release would disclose information concerning the regulation of
gift.
financial institutions [(b)(8) of the FOIA]
(b)(9) Release would disclose geological or geophysical information
PRM. Removed as a personal record misfile.
Roy
THE WHITE HOUSE
WASHINGTON
September 12, 1990
THE CHIEF of STAFF
TO: GOVERNOR SUNUNU
has seen
The attached was prepared by Bill
Martin, the former Deputy Secretary of
Energy under Reagan. You may recall
him from his help on the platform
in New Orleans.
This piece by Bill is interesting--
especially the policy prescriptions
portion at the end. We may not agree
with all his points, including his
rationale for modest use of SPR, but
they are worth considering.
Outside of SPR use on modest basis to
cool down price expectations (as it was
apparently used once before), Bill makes
a point (verbally) that the level of
leadership we're exercising now at IEA
leaves something to be desired, and should
perhaps be taken up a notch or two during
this crisis.
Given that both points are aimed at
keeping energy prices from spiraling out
of control with attendant impact on the
economy- some lesser steps to enhance our
leadership and coordination may be in
order.
Aim Jim Cicconi
The Gulf Crisis: Energy Implications and Solutions
William F. Martin
Washington Policy and Analysis
A Miller & Chevalier Consulting Group
The Gulf Crisis: Energy Implications and Solutions
William F. Martin
Washington Policy and Analysis
A Miller & Chevalier Consulting Group
Table of Contents
Executive Summary
2
Historical Perspective
5
Current Situation
11
Future Prospects--What if?
19
Tough Policy Choices -- Maintaining Market
Approaches in a Crisis
25
Long Term Energy Policy
35
Executive Summary
1.
There have been several threatening situations over the last twenty years in the world oil market. Today's situation is a reminder of the serious problems the U.S.
and other countries encountered in the 1970s and 1980s in securing adequate oil supplies. The Arab-Israeli War in 1973 and the Iranian Revolution in 1978-79 wreaked
havoc on international oil markets. However, faced with the Iran/Iraq war in 1980 which escalated into a tanker war in 1984-87, the IEA/OECD responded more effec-
tively and price disruptions were minimized. These experiences have demonstrated what might happen when oil supplies are threatened and what approaches are most
effective in dealing with the problem.
2.
Saddam Hussein's aggression throws world oil prices into an upward spiral. a situation that may get worse before it gets better. The UN-imposed embargo
against Iraq effectively removed 4 million barrels a day of oil from world markets and world oil prices shot upwards as concern over future oil supplies heightened.
While sufficient excess capacity exists elsewhere to cover this shortfall, concern over the security of Gulf oil supplies-which could be damaged as a result of military
action in the region-will keep oil prices above $25 in the short- to medium-term. A serious supply disruption to Saudi oil fields or infrastructure would sent prices
skyrocketing to $50 a barrel or higher.
3.
A major oil supply disruption would undermine global prosperity, development and security. An adequate supply of affordable oil is vital to the economic
prosperity of both industrialized and developing countries. Higher fuel bills mean inflationary pressures and less discretionary spending, driving personal consumption
downwards with a resulting drop in corporate profitability, employment and tax revenues. The effect of oil price increases has historically been most pronounced in
developing countries, some of which are still servicing mountains of debt acquired during oil price hikes a decade ago. Eastern European economies would also be hard
hit by high oil prices, compounding an already worsening energy situation brought on by Soviet demands for hard currency and market prices for Soviet oil exports.
4.
Led by George Bush, the world's leaders banned together in an unprecedented show of unity and force against Hussein's aggression. The level of international
unity and commitment shown has been hailed by many as a new approach to conflict resolution made possible by the reduction of East-West tensions, and President
Bush has been praised around the world for building this extraordinary consensus. The U.S. has a strong interest in sustaining an organized, international response to the
Gulf crises and is looking for all countries with a significant stake in the outcome to participate. Even without military escalation, it could be months before the conflict
is resolved—a conclusion that argues for a strong international effort to seek oil market equilibrium until oil supplies are once again relatively assured.
5.
The crises of the 1970s and 1980s have left us better prepared to deal with energy emergencies, but there could be the temptation to "go it alone" by many coun-
tries. Previous oil disruptions have taught us that international energy cooperation minimizes the disruptions-both economic and political-from an oil shock to all
countries. We also learned that relatively small supply disruptions can result in large price increases, oil markets are highly interdependent, and market forces are the
superior method of price determination and oil allocation. Nevertheless, the economic and political costs a shortage could entail could tempt some countries to abandon
international coordinated response efforts set in place to prepare for energy emergencies and pursue country-specific solutions instead. Previous efforts in 1973 and
1979 to "go it alone" heightened confusion, exacerbated supply shortfalls and sent prices spiralling upwards. On the other hand, a coordinated response in 1981 and
1984 minimized the effects of oil disruptions and enabled prices to remain stable.
-2-
6.
With history as our guide, we can tailor an international energy response to the Gulf crises. The international consensus and resolve so aptly demonstrated in the
political/military arena should characterize our energy response as well. A combination of increased oil production, coordinated stockdraw of government-controlled
stocks, limited demand restraint and fuel-switching could provide 9 million barrels a day of oil relief a sizeable cushion that will go a long way to calm oil markets
now and in the uncertain months ahead. Circumstances permit us to rely primarily on market mechanisms to resolve the short term problem; significant government
intervention could be counterproductive.
7.
To secure U.S. energy security in the long run, the Bush Administration should implement the comprehensive energy policy outlined by George Bush during the
Presidential campaign in 1988, including incentives for U.S. oil exploration, allowing exploration in the Alaska Natural Wildlife Refuge, continued support for DOE's
clean coal technology program and stepped-up research in conservation technology, renewable energy sources, alternative fuels and nuclear power. Efforts taken since
January 1989 to enact this plan including decontrolling natural gas and simplifying the nuclear licensing process will provide significant security benefits as well.
8.
Long-term international energy strategies will reduce the possibility of debilitating oil disruptions in the future. In general, there are two tasks well-suited to
international energy security policy: emergency preparedness and long-term energy supply and demand strategies. Improvements in IEA capabilities to respond to
emergencies, expanding government stockpiles, pursuing a more diversified global energy mix (based on coal, nuclear power, natural gas and new technologies) and
international energy research activities could make a valuable contribution to ensuring a more stable energy future for all countries.
9.
Finally, policymakers must strive to achieve a balance between three critical objectives: energy security, environmental quality and economic competitiveness.
Together we must seek solutions including reconciliation of conflicting objectives of efficient energy objectives with the need for reliable energy sources and concern
over public safety.
10.
If energy security is not achieved in the coming decade, other important objectives such as the successful transition of the communist world to market economies,
economic growth in the Third World, sustained economic success in the U.S., Japan and Europe and the integration of Europe may well be jeopardized. Now is the time
to consider energy strategies consistent with broader economic and environmental objectives and develop international policies that ensure our long-term energy future.
-3-
HISTORICAL PERSPECTIVE
Since the Early 1970s, Oil Prices Have Reflected International Events
Oil Prices Reflect International Events
70
Outbreak of
U.S. Oil Price
60
Iran/Iraq War
Decontrol
50
OPEC Decision
Iranian Revolution
To Regain
1985
40
Market Share
Dollars
per Barrel*
30
Arab Oil
Embargo
20
10
0
1970
1972
1974
1976
1978
1980
1982
1984
1986
*
Average quarterly cost of crude oil imported by U.S. refiners.
-6-
There have been several threatening situations over the last twenty years in the world oil market
Today's situation is a reminder of the serious problems the U.S. and other OECD countries encountered in the 1970s and 1980s in securing adequate oil supplies.
Revolution, war and a politically-inspired embargo resulted in several major supply disruptions that sent prices sky-rocketing and wreaked havoc on international oil
markets in 1973-74 and 1979-80. However, faced with the Iran/Iraq war in late 1980, which escalated to a tanker war, the IEA/OECD responded more effectively and
price disruptions were minimized. These experiences have demonstrated what might happen when oil supplies are threatened and what approaches are most effective in
dealing with the problem.
At the outbreak of the Arab-Israeli War in the fall of 1973, member countries of the Organization of Arab Petroleum Exporting Countries (OAPEC) imposed an
oil embargo against selected countries-including the U.S.-to retaliate for support to Israel; they also cut back on total production. Although the overall cutback was as
high as 3 to 4 million barrels a day (mbd), the average net supply disruption over a 6-month period was about 1.5 mbd. As a result of the cutback in production, prices on
the world market tripled from $4 a barrel to more than $12 a barrel. During this time there was no mechanism for international coordination and individual oil companies
were left to "go it alone" and scramble for supplies in a tightening market.
Oil consuming countries learned two very important lessons from the 1973 experience: international oil markets are extremely interdependent-a loss of supply
anywhere in the world affects prices for all nations; and energy could be used effectively as a political weapon especially if the world was caught unprepared. Emergency
planning procedures were needed to limit vulnerability to these tactics. Also, government efforts to control prices and allocate oil supplies were unsuccessful and led to
confusion, tightening supplies and consumer hardship. Allowing market forces to allocate worldwide and domestic supplies and set prices kept world oil markets in
equilibrium and minimized price increases. These conclusions argued strongly for international cooperation in dealing with oil disruptions and, as a result, the Interna-
tional Energy Agency was established in 1974 to assist its twenty-one member countries in developing coordinated mechanisms to limit oil disruptions in the future.
The next major supply disruption episode was precipitated by the Iranian Revolution in 1978-79 which eliminated up to 6 mbd a day from Iran's average produc-
tion. Other oil producing countries stepped-up production to help cover this shortfall, but there was still a net supply loss to the world market of 2-2.5 mbd for six
months. In response, the IEA called for 5% voluntary reduction in consumption which was supplemented by country-specific oil import targets devised at the Tokyo
Summit. This action was insufficient to calm fears of a serious, prolonged shortage and nations scrambled for oil. As a result of this frantic buying, prices sky-rocketed
from $14 a barrel to well over $30 a barrel. The lesson was clear: left unchecked, uncertainty about future oil supplies leads to "panic buying" exacerbating an already-
tightening world market.
-7-
Using Energy More Efficienty in the 1980s Has Reduced Our Vulnerability to Energy Emergencies Today
United States
200
OECD Economies
200
175
175
Reduced Energy
Use*
150
150
125
Quads
Quads
125
100
100
Reduced Energy
75
Use*
75
50
50
25
Actual Energy Use
25
Actual Energy Use
0
0
1972
1974
1976
1978
1980
1982
1984
1972
1974
1976
1978
1980
1982
1984
-8-
We learned some difficult lessons in the 1970s which were applied successfully to the crises in the 1980s
In 1980, war broke out between two major Gulf oil suppliers: Iran and Iraq. Remembering 1979, IEA countries called for specific measures to lower stocks and
avoid "abnormal highly priced purchases" on spot market. This action was effective-prices increased only marginally ($4 a barrel) and quickly dropped back to previ-
ous levels.
In 1984, escalating hostilities between Iran and Iraq resulted in the beginning of a tanker war in the Persian Gulf. A coordinated international response including
countries' willingness to drawdown stocks if necessary, combined with U.S.military muscle that protected the free flow of oil in the Gulf, and sufficient excess oil
capacity worldwide to cover potential shortfalls, reassured the market and price increases were minimized. President Reagan announced his attention to tap the SPR if
needed and the IEA agreed upon a coordinated stock drawdown policy. Largely as a result of this action, these attacks ultimately had little noticeable impact on the world
oil market.
The final major event in world oil markets in the 1980s was the price collapse of 1986 that persisted until earlier this year. Excess production by OPEC countries,
and conservation and fuel switching actions spawned by earlier price hikes and shortages, created a situation where there was an oil "glut." Oversupply exerted downward
pressure on prices, which dropped from $24.09 a barrel in 1985 (average annual price) to $12.45 in 1986.
President Reagan's Energy Security study in 1987 warned that lower prices would encourage greater dependency on oil-increasing our vulnerability to future
disruptions-and encouraged action to counter that trend; nevertheless, attention to energy security matters dwindled in those days of cheap, plentiful fuel. And for good
reason. Lower priced oil was a boon for the U.S. and world economy -inflation was low and the 1980s decade represented the longest period of economic growth in the
post-World War II period, due in no small part to lower oil prices. Nevertheless, our energy industry was hurt badly -drilling dropped, conservation slowed and devel-
opment of alternatives was hampered due to low oil prices.
As we entered the late 1980s, a sense of complacency regarding energy supply issues emerged in many consuming countries as energy policy became driven by
environmental and fiscal-not security-concems. Attention to environmental matters is a top priority in all nations, including the United States, but policies appeared to
be tilting too far in favor of environmental quality, at a cost of energy security.
Saddam Hussein's invasion of Kuwait on August 2 altered this situation, perhaps forever, by reminding us our vulnerability had not disappeared and, for the U.S.
and other countries, had actually grown worse. Overnight, an oil glut was transformed into an impending oil shortage, and energy security was thrust back to the top of
the global agenda.
-9-
THE CURRENT SITUATION
A Multinational Force is Organized to Counter Saddam Hussein
40,000 Turkish troops are based along
Despite Saddam's offer of a peace
"RESTRICTEES"
the border; additional combat aircraft
settlement, Iran offically
Saddam's
Incirlik
and missiles have been moved in
confirmed that it
would abide by the
bargaining
TURKEY
U.N. sanctions.
chips are
But policing
20,000 foreign
Iraqi pipelines
trade across the
border could be
nationals who
difficult
are not
Yumurtalik
permitted to
Syria has
leave
moved a
IRAN
Iraq and
significant
Kuwait
force to
SYRIA
the border
IRAQ
1,000,000 troops
CYPRUS
Baghdad
(total armed forces)
H
5,500 tanks
Possible
#
LEBANON
513 combat aircraft
Possible
embargo
embargo
hole
hole
Mediterranean
Shatt al
If there
Arab
Sea
is a treaty
Amman
with Iran. at least
Basra
300 000 troops from
Iraq's
JORDAN
eastern
border
Aqaba Baghdad
could join the
KUWAI
ISRAEL
road by which
160 000 in Kuwait
food and
EGYPT
Suez
supplies could
SAUDI ARABIA
Canal
enter Iraq
65,700 troops
550 tanks
179 combat aircraft
U.S. ships in the
Pers
gulf and the Red
Gu,
Aqaba
a
Sea are under orders
Cairo
to maintain the blockade
annuma,
by firing shots across the bow
of approaching ships if necessary
BAHRAIN
100 mi.
Dhahran
100 km
Red
Sea
The Pentagon has plans to put 250,000 air, sea and ground troops
in and around Saudi Arabia
-12-
Led by George Bush, the world's leaders ban together in an unprecedented show of unity and force against Hussein's aggression.
Experts around the world agree that President Bush's political/military response to Iraqi aggression deserves praise-especially for building extraordinary inter-
national consensus. Within hours of the invasion, the President had issued Executive Orders freezing Iraqi and Kuwaiti assets and blocking trade, and had started build-
ing consensus for an international embargo of Iraqi trade. Japan's early support, despite the country's well-known dependence on imported fuel, was seen as a coura-
geous move and helped sustain the momentum that culminated in the historic UN vote to launch (and subsequent vote to use force as necessary to enforce) an interna-
tional embargo on August 6.
The level of international unity and commitment shown has been hailed by many as a new approach to conflict resolution made possible by the reduction of East-
West tensions. The UN-unencumbered by superpower conflict-has acted with uncharacteristic swiftness and boldness to condemn and punish Iraqi aggression. There
is an awareness among foreign policy experts that we are setting out in uncharted territory and establishing new forms of cooperation that will become precedent in the
post-Cold War era.
The overall strategy being pursued by the U.S. and its Allies is to condemn Iraqi aggression, protect Saudi Arabia from attack, insist upon complete Iraqi with-
drawal from Kuwait, restoration of the legitimate Kuwaiti government, and protect foreigners held in Kuwait and Iraq. To this end, an international military effort was
organized by the Bush Administration (including the largest U.S. overseas military deployment since Vietnam) to counter Iraq's 160,000+ troops in Kuwait. At this
stage the posture of the international forces is defensive only, although there are those who advocate a preemptive strike to eliminate Iraqi capabilities to disrupt world
peace in the future. The U.S has a strong interest in sustaining an organized, international response to the Gulf crises and is looking for all countries with a significant
stake in the outcome-including both oil consumer and producers-to participate. Individual countries' contributions of troops, arms, materiel and funds commensurate
with their interests in the region are valued and will continue to be encouraged.
A quick solution seems increasingly unlikely. By most accounts, Hussein is an ambitious and tenacious leader, unafraid to sacrifice his people's well-being to
achieve his military goals of supremacy in the Arab world-a personality profile that seems incompatible with retreat. On the other hand, the UN stands by its resolutions
that demand a return to the status quo in the Middle East. Even without military escalation, it could be months before the conflict is resolved—a conclusion that argues
for a strong international effort to seek market equilibrium until oil supplies are once again relatively assured.
-13-
Emergency Stocks Provide an Effective First Line of Defense Against Oil Disruptions
Previous Supply
OECD
Disruptions
Stockdraw
5
(Average Net
Capabilities
Supply Disruption
(6-month Average)
Over 6-month
4
Period)
MMBD
3
OECD
Range of
Uncertainty
OECD
Depending on
2
Countries'
Stockdraw
USA
Policies and
Future Fill
1
USA
Levels
0
1973-74
1978-79
Arab Oil
Iranian
1986
1990
Embargo
Revolution
-14-
Today's oil market situation is serious, but containable.
Oil markets in the first half of this year continued to be characterized by oversupply, and oil prices fell to their lowest real price in a decade. OPEC struggled to
drive up prices by imposing quotas that would reduce production and minimize member countries "cheating." In particular, Iran and Iraq-struggling to rebuild their
economies under a mountain of war-induced debt and destruction-were desperate to raise oil revenues through a price increase. On July 17, Saddam Hussein of Iraq
accused neighboring states (specifically, Kuwait and UAE) of exceeding OPEC oil-production quotas and threatened retaliatory action. Four days later, Iraq moved tens
of thousands of troops to the Kuwaiti border. On August 2 Iraq overwhelmed Kuwait.
Days after Iraq invaded Kuwait, the UN Security Council unanimously voted to impose an economic embargo against Iraq which prohibited export of Iraqi and
Kuwaiti oil, as well as imports of consumer and military goods. As a result, 4.mbd of oil was withdrawn from the world oil market. The most significant customers of
Iraqi oil were the U.S. (620,000 barrels/day), Japan (230,000 barrels/day) and Turkey (335,000 barrels/day). Prior to the embargo, the US imported 8% of its oil from
Iraq and Kuwait and Japan imported 13.5% of its oil from the two countries. The most dependent IEA country is Denmark, where almost 85% of its oil imports came
from Kuwait.
Fortunately, both private and strategic stocks are quite high. By summer 1990, private oil inventories among IEA countries had reached an eight-year high, and
floating stocks were also high. At the end of June worldwide composition of stocks above normal commercial levels were approximately 180 million barrels.
In addition, there are sizeable government stocks: the U.S. Strategic Petroleum Reserve (SPR) holds almost 600 million barrels, West Germany.ha 190 million
barrels and Japan has 175 million barrels. In addition, other IEA countries hold 90 days of imports in government-controlled company stocks. Together, these stocks
would cover major oil consuming nations total oil imports for 5 months; government stockpiles alone could cover Iraqi and Kuwaiti oil production for over six months.
Despite these relatively high stock levels, Iraq and Kuwait are major oil suppliers and Iraq's invasion of Kuwait-and the subsequent embargo-fundamentally
changes the oil market outlook from one of surplus to one of impending shortages.
The IEA estimates world demand for oil in the fourth quarter of 1990 will be 55.3 mbd, an increase of 2.7 mbd over third quarter demand due to seasonal factors.
We believe that this is a conservative estimate. The ultimate level could be much higher in the event countries and their oil companies seek to build stocks in light of
market uncertainties.
The IEA predicts that a shortfall in oil will begin to be felt in September, which they estimate to be in the .7 mbd range. They expect the shortfall to become
more severe in the fourth quarter when increased seasonal demand kicks in, resulting in a shortfall of up to 5 mbd (with the .6-3.5 mbd range most likely) depending on
other producers' willingness to increase production and pending problems in other oil-producing areas. The most severe IEA scenario, which calls for a North Sea strike
in addition to embargo restrictions, predicts a shortfall of 5 mbd which is approximately 10% of world supplies.
In addition, there is growing concern about the supply of oil products. Kuwait was a major supplier of refined products to the United States. Certain regions of
the United States, including Hawaii, are having difficulty finding alternative sources and there could be shortfalls as soon as November.
-15-
OPEC CRUDE OIL PRODUCTION AND CAPACITY
Capacity Available
Country
OPEC Quota
in 1 month
in 3 months
Saudi Arabia
5.38 mbd
7.0 mbd
7.5-8.0 mbd
Iran
3.14 mbd
3.2 mbd
3.3 mbd
Iraq
3.14 mbd
(3.5 mbd)
(3.5 mbd)
UAE
1.50 mbd
2.2 mbd
2.2 mbd
Kuwait
1.50 mbd
(2.0 mbd)
(2.3 mbd)
Qatar
.37 mbd
.5 mbd
.5 mbd
Nigeria
1.61 mbd
1.9 mbd
2.0 mbd
Libya
1.23 mbd
1.4 mbd
1.5 mbd
Algeria
.83 mbd
.8 mbd
.8 mbd
Gabon
.2 mbd
.3 mbd
.3 mbd
Venezuela
1.95 mbd
2.4 mbd
2.5 mbd
Ecuador
.28 mbd
.3 mbd
.3 mbd
Indonesia
1.37 mbd
1.3 mbd
1.4 mbd
TOTAL CRUDE OIL
22.49 mbd
21.4 mbd
22.8-23.3 mbd
-16-
Other producers can help offset some of the loss from world oil markets, but consuming countries could aggravate the problem by building stocks.
One of the major factors affecting the worldwide flow of oil in the short to medium-term future is the capacity of other oil exporters to increase production.
Saudi Arabia has announced its intention to increase production substantially, and the IEA estimates that they can produce an extra 2 mbd immediately with an additional
.7 mbd following in 2-3 months. Venezuela and the UAE-the only two other countries with significant surplus capacity-are expected to increase production for a total
of about 1 mbd. Other producers (Algeria, Gabon, Indonesia, possibly Iran) could add another .5 mbd to world oil supplies. Thus, most of Iraq and Kuwait production
could be covered by other producers.
In addition to production capacity, there are two other critical factors to consider when predicting future oil flows. The first is the security of Gulf oil supplies,
namely from Saudi Arabia and UAE. Damage to oil fields, pipelines or transportation infrastructure as a result of military action in the area could cause an additional
drop in OPEC production which some experts predict could be as high as 10-14 mbd (two-thirds of US, European and Japanese oil imports). A disruption of this magni-
tude-20% or more of world oil supplies-is unprecedented.
Second, oil demand could veer away from predicted levels in either direction with prices shifting accordingly. Forces that could keep consumer demand for oil
in check include: (1) reaction to higher prices (demand elasticity). A hard-learned lesson by oil producers in the 1970s and 1980s was that given time to adjust, consum-
ers do cut back on oil consumption in the face of higher prices; (2) demand restraint. Government-initiated demand restraint measures including driving restrictions and
fuel taxes could dampen demand for oil; and (3) economic conditions. A sustained oil supply disruption with attendant high prices will result in slower economic
growth, reduced industrial activity and lower demand for oil.
History has shown us, however, that there are competing forces that could drive oil demand upwards even when prices are high, including: (1) concern over security of
supply. Previous energy crises have demonstrated that the universal approach to a perceived shortage of oil is to build inventories-countries do it, companies do it,
individuals do it. Experts estimate that this "panic buying" can add as much as 2 mbd to oil demand. Even during periods of very high prices in 1979-80, major oil
consumers worked desperately to increase stocks, with some buyers paying a "premium" to secure contracts; and (2) fuel needed for military purposes. Maneuvers in
the Gulf have already caused minor disruptions in the delivery of some oil products, with Saudi Arabia diverting diesel fuel away from Japanese and other customers to
provide for military needs.
Finally, psychology of the marketplace is a subjective factor that cannot be underestimated, and should be considered within the context of the political/military
policymaking that is unfolding. Events that have no apparent direct effect on the availability of oil supplies can nevertheless exert strong influence on world oil markets.
-17-
FUTURE PROSPECTS - WHAT IF?
"WHAT IF?"
Scenario
Effect on Oil Supplies
Effect on Oil Prices
NEGOTIATION
Stepped up production by OPEC
$21-$25/barrel
countries covers Iraqi/Kuwaiti shortfall
Oil markets in fragile equilibrium
ESCALATING
Concern over future supplies pushes
Close to $30/barrel
STALEMATE
demand for oil upwards, despite higher
prices
Demand exceeds supply by 2.5-4.0 mbd
WAR
Gulf production infrastructure
$50+/barrel
is damaged
10 mbd or more (20% of world supplies)
is removed from world oil markets
-20-
In a climate of uncertainty, looking ahead to ask" What if?"
It is against this backdrop of competing forces and uncertainty that we look ahead to try and predict what is likely to happen in the world oil markets over the coming
month. Three scenarios are provided below that we feel cover the range of possibilities:
Scenario A-Negotiation-is a situation similar to early August, with the embargo in effect (with minimal leakage), Hussein in Kuwait and an international
military force in the region to protect Saudi Arabia. With Hussein unwilling to withdraw-yet not launching any new attacks-and the international community commit-
ted to UN resolutions condemning the occupation of Kuwait, the situation would settle into a stalemate and uncertainty would slowly diminish from today's levels. All
but 1 mbd of Iraqi and Kuwaiti oil production would be offset by other producers and a serious supply disruption would be avoided. Lingering uncertainty will continue
to exert pressure on oil prices which will be sustained at $25-$30 level; although if additional conflict is avoided, markets will calm in 6-9 months and prices will settle
in the $21-$25 range. Although this scenario, which does not offer a solution to the problem of returning Kuwait to the status quo or limiting Hussein's capabilities for
future aggression, may pose some political problems over time (particularly for George Bush), overall disruptions to oil markets and global economic growth would be
relatively minor.
Scenario B-Escalating Stalemate-the trends revealed in August continue: escalating rhetoric, a growing international military presence, concern over the
hostages and a general sense of foreboding about future hostilities. Military activity may be stepped up somewhat, perhaps as a result of enforcing the embargo, resulting
in some causalities. This situation, while falling short of a full-fledged war in the region, would continue to focus global attention on the conflict and uncertainty would
persist. Although Saudi Arabia, Venezuela and other countries would step up production 3-3.5 mbd, concern over the security of future oil supplies would exert upward
pressure on demand which, combined with winter demand for heating oil, would result in a shortfall of 2.5-4.0 mbd. Shortages and uncertainty would maintain prices at
August high levels of $30 a barrel or higher. Although oil supplies would probably not drop below the 7% "trigger" that requires IEA action, government stocks would
be released to counter oil consumers' increased stockpiling activity. As government stocks are tapped, prices will ease somewhat, but due to uncertainty about the long-
term energy picture, they will remain over $25 a barrel.
Scenario C-War-our "worst case" option, predicts a more serious disruption than that posed by the IEA. (The maximum shortfall predicted by the IEA is 3.5
mbd, or 6.8% of world supplies). In this scenario, international forces are provoked into a shooting war with Iraq and, as a result, Persian Gulf oil production infrastruc-
ture is damaged. Either as a result of damage to the oil fields in Saudi Arabia or the UAE, pumping stations, pipelines and/or shipping infrastructure, Persian Gulf
production outside of Iran is seriously curtailed. Some experts predict that as much as 10 mbd could be taken off the oil market in addition to Iraq and Kuwait's 4 mbd-
a major disruption that could send prices skyrocketing to $50 a barrel or higher. Total excess production capacity in other countries, including Libya and Iran, at approxi-
mately 1.5 mbd would come nowhere close to covering this major shortfall. Coordinated stock drawdown procedures would be implemented; however, prices would be
prohibitively high and serious economic repercussions would reverberate around the world.
-21-
High Oil Prices Exert Upward Pressure On:
-Unemployment
-Inflation
-Demand/Strength of the Dollar
-Demand for U.S. Exports
-Interest Rates
-LDC Debt
High Oil Prices Exert Downward Pressure On:
-Social Payments
-Economic Growth:
Consumer Spending
Business Investment
Demand for Imports
-Corporate Profits
-Hard Currency ($) Reserves
-Stock Prices
-22-
A major oil supply disruption would undermine global prosperity, development and security.
An adequate supply of affordable oil is vital to the economic prosperity of both industrialized and developing countries. An oil price increase has a strong effect
on the operating costs of many industries including chemicals, airlines and trucking. These higher costs are passed along to consumers, who must contend with higher
costs for home heating fuel and gasoline as well.
Higher fuel bills mean less money is available for discretionary goods and personal consumption falls. Corporate profitability and investment decline, unemploy-
ment rises and tax revenues drop. Economists predict that a sustained oil price increase in the $26 range would increase inflation in OECD countries on average between
1-2% over previous forecasts, while economic growth (Gross Domestic Product) would slow by .3-1%. Conversely, lower-priced oil augments consumers' purchasing
power and favors economic expansion. Low-cost oil during the Reagan years fueled the country's longest peacetime expansion in history.
The effect of oil price increases is most pronounced in developing countries The oil price hike in the 1970s demonstrated that Third World economies are
particularly hard-hit during supply disruption. Many developing countries still struggle today under crushing debts acquired over 10 years ago to cover prohibitive fuel
bills. Furthermore, worldwide recessions brought on by previous oil shocks resulted in loss of export markets for developing countries, further exacerbating their balance
of payments problem.
High oil prices pose special problems for emerging market economies in Eastern Europe. The price and supply ramifications of the Iraqi invasion compound East
Europe's already worsening energy situation brought on by Soviet oil producers' demands for hard currency transactions and market prices. Growing oil bills will
worsen the region's balance of payments, particularly in Bulgaria, Czechoslovakia and East Germany where $30 oil prices would absorb 66-120% of these countries'
hard currency reserves. Crushing energy bills could complicate the region's transformation to market economies and planned economic growth and development.
The U.S. fiscal situation has policymakers particularly worried about the effect that the current supply disruption will have on an economy that is arguably in the
early stages of a recession. There is growing concern that increasing oil prices will exert further downward pressure on the economy and cause a serious recession or a
depression. The next troubling economic indicator will be the August trade deficit, swollen by high oil bills. A second pressing problem is devising a politically-accept-
able deficit reduction package; the Iraqi invasion preempts two of the major components of plans proposed early this summer: energy taxes and major defense cuts. At
this point, it is unclear how Gramm-Rudman mandated deficit reduction levels of $50 billion will be achieved in time to avoid a sequester. Left with few politically-
viable, economically-sound options, the Bush Administration may opt for reducing ambitious Gramm-Rudman deficit reduction targets to $20 billion or lower.
-23-
TOUGH POLICY CHOICES - MAINTAINING MARKET APPROACHES IN A CRISIS
Tough Policy Choices-Maintaining Market Approaches in a Crises
World Crude Oil Reserves
(700 Billion Barrels)
Mexico
Saudi Arabia
U.S.S.R.
U.S.
Others
Other
Persian Gulf
-26-
The crises of the 1970s and 1980s have left us better prepared to deal with energy emergencies, but there could be the temptation to "go it alone" by many countries.
Our understanding of oil markets has improved as a result of painful oil disruptions, yielding information we can put to use in grappling with today's problems.
In particular, we learned that
-Relatively small supply disruptions can result in large price increases. The oil shocks in 1973 and 1978-79 reduced the world oil supply by less than 5%, yet
prices skyrocketed in both situations.
-Oil markets are highly interdependent. Oil is a fungible commodity; thus, a shortage in one country affects prices around the globe. Likewise, if one country
releases stocks, prices are reduced everywhere.
-Reliance on market forces is the superior method of price determination and oil allocation. Government efforts to establish price controls and dictate allocation
patterns, including those imposed by the U.S in the late 1970s, exacerbated supply problems and compounded consumer hardship.
These previous energy emergencies had serious economic repercussions, and countries have worked diligently to reduce their vulnerability to future disruptions.
Progress was made on a number of fronts that enhanced our capability to respond to energy emergencies, including:
-The IEA was established to provide the mechanism and procedures to organize a coordinated response to minimize the effects of oil supply disruptions. A
central feature of the IEA is its emergency sharing mechanism which can be triggered if there is an oil shortfall of 7%. The IEA has never triggered the system,
preferring to rely on market forces. Nevertheless, it represents an important "last resort" option which can also serve as a useful deterrent to politically motivated
cutoffs of oil.
-Strategic stocks were significantly increased, helping to offset the danger of dependence on imported oil. At the time of the 1973 oil crisis, government stocks
were practically non-existent. Currently, government controlled stocks in IEA countries cover 151 days of net oil imports, providing some "breathing room" to
resolve short-term production shortfalls.
-Oil price increases spurred major efforts to reduce oil consumption and use energy more efficiently. Significant developments include substitution of alterna-
tive fuels for oil in generating electricity (in the U.S., since 1970 oil's share of the utility market dropped from 11.4% to 5.7%), advances in technology that
provided sizeable energy-productivity improvements in industry consumption and the transportation sector, and improvements in home construction that dra-
matically decreased household energy consumption.
-High oil prices encouraged new oil production in countries in North and South America, Asia, Europe and the Soviet Union, resulting in a reduction in OPEC's
market share (and leverage). However, the price collapse of the last three years has discouraged new exploration and many fields in the OECD region are deplet-
ing at an alarming rate.
-27-
Complementary International Energy Policy Solutions Are Essential
-28-
Facing the first major challenge to oil supplies in almost a decade, and recognizing the economic and political costs a shortage could entail, there is a temptation to
"go it alone" in securing adequate oil supplies.
Devising a coordinated response requires time and may result in a solution that appears less than optimally suited to any one country's national interest. It may
seem more efficient to forgo the international process and devise a country-specific solution instead. Decisive, early action could lock in needed oil supplies and preempt
shortages and price increases. Why not "go it alone?"
Emergency preparedness is a global responsibility; moreover, our experience in dealing with energy emergencies has demonstrated that a coordinated response
maximizes benefits to all economies:
-coordinated stock draw down policies minimize increases in the world price of oil and help ensure equitable allocation;
-concerted action by the U.S. ,Japan and Europe to discourage "abnormally high priced oil purchases" has been a moderating factor in the past;
-international response diminishes political conflict and reduces tension between consuming countries;
-coordinated behavior, consistent with the principles upon which the IEA was founded, helps ensure the viability of this organization. The future availability of
valuable IEA services such as monitoring oil markets are dependent, in part, on the organization's ability to meet its primary objective.
Previous efforts in 1973 and 1978-79 to ignore the international process and build individual stockpiles heightened confusion and uncertainty, exacerbated supply
shortfalls, and sent oil prices spiraling upwards. On the other hand, a coordinated response in 1980 and 1984-85 enabled prices to remain stable.
The evidence is clear: international energy cooperation minimizes the disruptions-both economic and political-from an oil shock world-wide and should be
vigorously pursued by all member countries of the IEA.
-29-
A Framework for Action: Making up for Iraqi & Kuwaiti Production
-Stepped up production from OPEC and OECD producers
3 mbd
-Coordinated Drawdown of Government Stocks
4 mbd
-Limited Demand Restraint
1 mbd
-Fuel Switching
1 mbd
TOTAL SAVINGS
9 mbd
-30-
With history as our guide, how can we best deal with the current supply disruption?
The international consensus and resolve that has been demonstrated in the political/military arena in condemning Saddam Hussein's aggression should character-
ize our energy response as well.
A variety of actions can ensure adequate oil supplies to offset Iraqi and Kuwaiti production of 4 mbd:
-Major oil producers, including Saudi Arabia, the UAE and Venezuela are increasing their oil production. Sufficient excess capacity exists in the world to add
approximately 3 mbd to oil supplies within 60-90 days.
-A coordinated stock draw of government-controlled stocks could add (at a maximum) an additional 4 mbd to oil markets, while preserving significant stocks to
protect against future disruptions;
-Limited demand restraint policies could be encouraged, reducing demand by approximately 1 mbd. Legislating and implementing conservation policies can be
time-consuming; "easy" measures should be emphasized to provide timely, effective demand reduction.
-Although the most significant easily-implemented oil savings from fuel-switching practices in OECD countries have already been realized, additional effort to
substitute gas for oil in industry could probably reduce oil demand by 1 mbd.
Together, these measures provide 9 million barrels a day of oil relief. a sizeable cushion that will go a long way to calm oil markets, now and in the uncertain
months ahead.
-31-
Responding to the Gulf Crisis
Black Sea
Greece
U.S.S.R.
Caspian
Sea
U.S.S.R.
Turkey
Mediterranean Sea
Cyprus
Syrla
Afganistan
Lebanon
Iran
Iraq
Israel
Jordan
Pakistan
y b L I
Kuwall
Neutral
Egypt
Zone
Bahrain
Persian
Qatar
Gulf
Unit Arab Emirate
Saudi Arabia
Oman
Red
Sea
Sudan
North
South
Yemen
Yemen
Arabian Sea
Djibouti
0
100
200
300
400
Ethlopia
Somalla
Miles
-32-
Tailoring a short term international energy response to the Gulf Crisis
With regard to the current oil disruption, the U.S. should insist upon the same level of international cooperation in the energy arena that was successfully achieved
in devising a political/military response.
The U.S. should make clear that as long as the embargo is in effect, "abnormal" buying behavior will not be tolerated. Since the U.S. is carrying the bulk of the
military burden of securing Gulf oil flows for worldwide consumption, it seems only fair to expect that the energy burden be equitably shared by all.
A major policy question is whether to draw down government strategic stocks in the U.S., Germany and Japan. There are two contrasting views. The first is that
stocks should be drawn early in a crisis, thereby reducing the potential for oil price spikes. This strategy seeks to protect the world economy early in a crisis but has the
downside that stocks can be used only once and then must be replenished. Also, there might be less incentive for producing countries with available surplus to put their
added production on the market, if the OECD countries are lowering their stocks. Another view is that stocks should be used as a last resort. If the military confrontation
is prolonged these stocks would be available in potentially desperate situations (such as, for example, restriction of oil flow from Saudi Arabia). This approach appears to
be favored at the moment by the U.S., Japan and Germany. However, reluctance to draw any stocks at this time could result in much higher oil prices with damaging
impact on the world economy.
We believe that there may be a compromise position between these two extremes. Our approach would be to use some stocks today as a reminder to markets and
to Mr. Hussein that we have the potential to greatly expand stock draw should the situation necessitate. Given other options available to OECD nations such as increased
production, demand restraint and fuel switching, we believe that a stock draw of 1-1.5 million barrels a day would be adequate to send the appropriate signals, but at the
same time not deplete the reserves at an alarming rate.
Considering the contribution already provided by the U.S. military-and the U.S.' relatively minimal dependence on Kuwaiti and Iraqi oil-an equitable coordi-
nated drawdown policy could call for Germany, Japan and the U.S. to draw equal amounts (for example, 300-500,000 barrels per day) beginning in early October. Since
the U.S. has a larger SPR than either Japan or Germany, this plan would in effect proportionally reduce the U.S. burden, and provide Japan and Germany the opportunity
to make a sizeable contribution to the international effort commensurate with their interest in the region.
Countries that do not have stocks to provide to the world market should be called upon to do their part through demand restraint measures and fuel switching that
yield comparable oil supply savings (1.5 mbd). Together these measures would reduce demands on world oil supplies by at least 3 million barrels per day which, com-
bined with increased production by OPEC suppliers, would cover the most likely oil supply disruptions.
A disproportionate burden on American soldiers, taxpayers and energy consumers would certainty be resented at home, and should not be the price of leadership.
Using our strategic petroleum reserve-without comparable effort from other countries-would be politically unwise and internationally unfair.
-33-
LONG TERM ENERGY POLICY
We Will Remain Vulnerable to Oil Supply Disruptions in the Future
PERSIAN GULF OIL RELIANCE GROWING
(illustrative)
World Oil Demand
World Oil
Production
(million
barrels/day)
50 --
Required Persian
Gulf Production
Declining Production in:
United States
Soviet Union
Mexico
Canada
North Sea
OPEC nations (outside Gulf)
1990
2000
-36-
Even if we resolve the short term crisis successfully, dangers still exist for future oil markets
Hussein's aggression is a stark reminder that we cannot afford to take our energy security for granted, now or in the future. Trends that have increased our
vulnerability to oil shocks in the past persist and are seemingly irreversible, including:
-Oil production outside of OPEC is faltering. With the exception of OPEC countries, most other major oil producers (U.S., USSR, Mexico) have reached their
peak and production has leveled off or is in decline. OPEC's share of the oil market, held in check during periods of high exploration and drilling in the 1980s, is
once again on the rise.
-Oil reserves are concentrated in the Persian Gulf. The disruption that we are struggling with today focuses on oil production: Hussein is in control of about
8% of current world oil production capacity. A more ominous fact is that 25% of the world's proven oil reserves are in Iraq and Kuwait. In total, 63% of the
world's know oil reserves that can be recovered economically with current technology are in the countries surrounding the Persian Gulf. As time goes on, and
non-OPEC production continues to decline, our dependence on Persian Gulf oil supplies will grow even stronger.
-Continued Middle East conflict. Revolution, wars and other armed hostilities that have affected life in the Middle East for centuries show no sign of abating.
In addition to the ongoing Arab-Israeli conflict, the resurgence in Islamic fundamentalism, terrorism sponsored by the PLO, Libya and Syria, the refusal to
release Western hostages and the failure of the UN forces to sustain a peace-keeping mission in Lebanon, Hussein's tactics are a reminder of two new threats to
stability and peace in the region: the growing ability of countries to acquire advanced military technology and the growing dissatisfaction over the gap between
the "haves" (in Kuwait, Saudi Arabia, UAE) and the "have nots" (in Jordan, Syria, Iraq, Yemen). The Arab-Israeli and Iran-Iraq wars demonstrated that intra-
regional conflict can threaten oil supplies and prices around the globe. Future skirmishes could be equally disruptive.
These facts lead foreign policy and energy experts to conclude that the concentration of oil reserves in the world's most unstable region poses a threat to world peace and
global prosperity. Pursuing an energy policy that limits our vulnerability to disruptions is a matter of national security and a paramount diplomatic objective.
-37-
"We need to bring some common sense to the table
and face up to the looming challenge of our increasing
reliance on unstable foreign sources of oil."
Vice President George Bush
1988 Presidential Campaign
Houston, Texas
July 24, 1988
-38-
What the U.S. can do to ensure energy security in the long run...
There are a number of cost-effective policies, consistent with a market-driven approach, which can ensure long-term U.S. energy security.
The following actions would reduce our vulnerability to energy emergencies in the future:
(1) Implement tax incentives for exploration to restore the U.S. oil industry;
(2) Allow oil and gas exploration in the Alaska Natural Wildlife Refuge and in promising offshore areas-all in an environmentally sensitive manner;
(3) Encourage greater use of abundant natural gas;
(4) Increase the fill rate of the Strategic Petroleum Reserve (SPR), with a goal of 750 million barrels by 1993.;
(5) Continue DOE's clean coal technology program to reduce acid rain and other environmental problems;
(6) Encourage coal exports by fighting foreign coal subsidizes and promoting long-term contracts with U.S. suppliers;
(7) Support nuclear power by streamlining licensing and funding research into new reactor designs;
(8) Support conservation strategies;
(9) Encourage research and development of renewable energy resources such as geothermal, solar and windpower.
(10) Support a major effort to develop alternatives to oil for the transportation sector, including electric and solar-powered cars and
natural gas-based fuels.
These actions, taken together, comprise an energy strategy that has clear security benefits, provides for economic growth and is consistent with environmental
objectives and public safety concerns, while not detracting from the quality of life that Americans have worked hard for and come to expect. Many of theses policies are
consistent with the energy platform ennuciated by George Bush during his 1988 Presidential campaign.
-39-
Global Energy Use, 1950-1985*
125.0
250
Other
112.5
Hydro
200
Nuclear
100.0
87.5
Coal
75.0
150
Quadrillion BTU's
62.5
Natural Gas
50.0
100
Millions of Barrels per Day
of Oil Equivalent
Oil
37.5
25.0
50
12.5
00.0
0
1950
1955
1960
1965
1970
1975
1980
1985
*Excludes centrally planned economies
Source: U.S. Energy Information Administration, United Nations,
Shell Briefina Service
-40-
A more diversified global energy mix can be facilitated by international action.
In addition to efforts undertaken by the U.S. and other individual countries to limit their vulnerability to energy disruptions, coordinated international energy action can
make important contributions to global energy security. A nuclear power plant in Japan, a clean-coal generation project in Italy, a geothermal project in Central America
or a hydropower plant in China all serve to reduce world demand for oil-and all countries reap the benefits. Important alternatives include:
Coal-which has increasingly been used as a substitute for oil in generating electricity in the U.S., Japan and other countries-can be expanded further to
reduce oil consumption in the utility sector. Currently, concern over the relatively high environmental costs associated with coal burning has limited the appeal of
this important and abundant fuel. However, clean coal technology research in the U.S. and Japan has yielded some promising developments, which will enable
coal to be more burned more cleanly in the future. Expanded international trade in steam coal can help lower energy costs in coal-importing countries. Effort
should be made to reduce local subsidies (particularly in Germany, the UK and Belgium) which raise costs and lower economic efficiency.
The future outlook for natural gas is bright. We predict that the environmentally superior attributes of natural gas-and its abundant worldwide reserves and
relative low price-will make natural gas the world's fastest growing fossil fuel in the next two decades. Many countries are expressing interest in expanding
consumption of natural gas-stepped up production in the North Sea, Alaska, the Pacific and USSR would help ensure supplies that could keep pace with de-
mand. European efforts to deploy timely investment in gas infrastructure and diversify gas supplies would contribute to a more secure supply of natural gas in the
years to come.
Nuclear power has been a major contributor to reducing major energy consumers reliance on imported oil (including the U.S., France and Japan) in the utility
sector, and continued or expanded use could extend these benefits further. Public opposition remains a constraint to further development of nuclear power, but
new more modular and standardized designs may help nuclear energy regain its momentum. International efforts to develop the new generation of "inherently
safe" reactor technology, establish efficient and safe procedures for nuclear waste disposal, and enforce stringent international public safety standards when
operating nuclear power plants-particularly in developing countries and the Soviet Union-could go a long way in reassuring the public about nuclear power
and protect its position in a diversified global energy portfolio.
Finding substitutes for oil in the transportation area offer promise for the future and provide security benefits by reducing dependence on oil; international
research collaboration could help bring these technologies to market in a timely, cost-effective manner. Non-oil-based transportation fuels offer special promise
in this regard, since so much of the world's oil consumption is devoted to the transportation sector. International research programs on effective, economic
conversion technologies for non-petroleum transportation fuels such as electric vehicles, solar power autos, and natural gas based fuels such as methanol could go
a long way toward realizing the potential contribution of renewable resources to worldwide energy security.
Conservation technologies. Largely as a result of significant advances in transportation technologies and residential construction designs that did not adversely
affect consumers' lifestyles, OECD countries consumed slightly less oil in 1989 than in 1970, despite significant economic growth during this period. Future
breakthroughs in conservation technologies could help maintain this significant progress.
-41-
Energy Policy Today and In the Future Must Strike a Balance
-42-
Conclusion — finding the balance between energy security, environment and economic competitiveness
There has been a growing awareness in the past few years that the environment is a global responsibility. Water and air pollution, acid rain, "greenhouse gases"
and nuclear radiation know no national borders and a consensus has emerged that the global nature of these problems dictates a global response.
These arguments are equally compelling for energy security policy: interconnected world markets require an international approach. Efforts to "go it alone" and
ignore the international process are not only inefficient from a market perspective, but can result in creating conflict among consuming nations that could damage overall
bilateral relationships including security alliances, trading relationships, cultural exchanges etc.
Finally, policymakers must strive to achieve a balance between three critical objectives: economic competitiveness, energy security, and environmental quality .
While some policies may be consistent with all three goals, others may not. Together we must seek solutions including reconciliation of conflicting objectives of efficient
energy consumption with the need for reliable energy sources and concern over public safety. The events of the past few weeks have demonstrated that we cannot forget
the security aspect of energy policy, even during periods when oil is cheap and plentiful.
If energy security is not achieved in the coming decade, other important objectives such as the successful transition of the communist world to market econo-
mies, economic growth in the Third World and in industrialized countries, and the integration of Europe may well be jeopardized. Now is the time to consider energy
strategies consistent with broader economic and environmental objectives and to develop international policies that ensure our long-term energy future.
-43-
1990-08-28 23:57 OCDE_AIE
45 24 79 21
P.02
ORGANISATION FOR ECONOMIC
RESTRICTED
CO-OPERATION AND DEVELOPMENT
Paris, drafted:
28 August 1990
INTERNATIONAL ENERGY AGENCY
dist:
IEA/GB(90)25
GOVERNING BOARD AND MANAGEMENT COMMITTEE
IMPLICATIONS OF THE GULF SITUATION
FOR IEA/OECD COUNTRIES
(Note by the Secretariat)
AUGUR 1997 (23:08)
1990-08-28 23:58 OCDE_HIE
- 2
IEA/GB(90)25
TABLE OF CONTENTS
I.
INTRODUCTION AND SUMMARY
II.
SUPPLY DEMAND SITUATION
III. SUPPLY DISRUPTION ASSESSMENT
IV.
EMERGENCY RESPONSE CAPABILITY OF IEA COUNTRIES
1990-08-28 23:59 OCDE_AIE
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IEA/GB(90)25
I. INTRODUCTION AND SUMMARY
1. At its meeting on 9th August, the Governing Board found that "the present oil supply
situation is such that, given the availability of supplies at sea, the high level of company and
government controlled stocks, as well as the possibility of higher output from oil producers,
including OPEC Member states, sufficient oil supplier are currently available to compensate for the
loss of Iraqi and Kuwaiti crude and product to the market". And, as a result, there was "no need
for recourse to the IEA emergency response system at this time".
2.
The SEQ met On 16th August to prepare "the necessary steps and instruments for
implementation of co-ordinated actions, including stockdraw". should the activation of emergency
response measures be deemed appropriate by the Governing Board. Following a preliminary review
in the SEQ of the emergency response potential of Member countries, each administration provided
information on measures it might use to meet theoretical and illustrative losses of supplies to the
OECD of the following magnitudes: 1.5 mbd, 2.5 mbd, and 3.5 mbd.
3. In addition to examining hypothetical responses to supply shortfalls, the SEQ received reports
from administrations on measures already taken. Since the Iraqi invasion of Kuwait, IRA/ORCD
Governments have implemented a wide range of measures for oil saving, replacement and increased
production. Moreover, they have encouraged switching to other fuels notably in electricity
generation. While the impact of measures such as exhortations about driving behaviour are difficult
to quantify, other effects can be calculated with some precision. These include postponement of
purchases for strategic stockpiles, and fuel switching. On conservative assumptions, the combined
effect of all measures is estimated to be not less than 500 000 bd. This does not take account
of the policy of most IEA governments on higher oil prices which is to allow them to be passed
on to final consumers such as motorists and airline operators thus providing a strong incentive to
reduce demand.
4.
The Standing Group on the Oil Market (SOM) met on 23rd August to review further the
effect of the embargo of Iraqi and Kuwaiti crude oil and products on international oil markets and
in individual Member countries. The Secretariat's analysis of the supply demand situation leads
to the following conclusions:
--
The oil market at present is generally well supplied as most crude oil arrivals in
August were largely loaded in July. The small shortfall in late August arrivals has been
easily made up by stock draw.
1000
(23.08)
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- 4 -
IEA/GB(90)25
The full loss of Kuwait and Iraqi crude oil (4.3 mbd) will be initially felt during
--
September. The onset of production increases from other OPEC countries was delayed
in August and will not reach significant levels until September. Thus, there will be
little increment in September arrivals from the other OPEC producers. However, with
sufficient stocks available worldwide, a large stockdraw in September will help
compensate for much of the shortfall.
In October, much of the shortfall is expected to be made up from higher OPEC
production that is expected in September. Statements by Saudi Arabia and Venezuela
indicate that their increased production will be forthcoming even without an OPEC
consensus. Once this has been established, we expect that other OPEC members will
raise production and take advantage of the higher prices. Further stockdraw will also
help cover the shortfall in October.
While shortfalls in September and October should be adequately made up from
stockdraw, higher production, and somewhat lower demand should the shortfall persist,
the market will become increasingly tighter during the winter months. This will come
at a time when demand is scasonally highest and as the ability for significant
commercial stockdraw gradually diminishes. Severe cold weather and/or industry
accidents (refineries, platforms and equipment will be running flat out) could complicate
the situation further. A more critical element is that if the shortfall indeed continues,
the industry will be up against capacity in the supply/demand chain and thus be
extremely vulncrable to any further disturbance.
--
The degree of refinery flexibility to feedstock change is another factor affecting the
supply/demand balance for petroleum products. Any new "surge" supplies achieved
in the context of the current crisis -- regardless of their magnitude -- cannot avoid
changing to a greater or lesser degree the menu of crudes from which refiners must
select. Those oils considered most likely to replace Kuwaiti and Iraqi crudes, which
average around 32.5 degree API and have a sulphur content of over two per cent, are
probably going to be heavier (ca. 30 degrees API), but lower in sulphur. Since some
important upgrading capacity has now been lost in Kuwait itself. refiners will he
constrained to produce more heavy products than would normally be the case. Light
oils will increasingly be at a premium.
--
In sum, company stock draws and producer country short-haul inputs should dovetail
with the receipt of expected increases in OPEC output in a manner which will keep
global net primary supply reductions measurably under one half a million barrels per
day through October. This order-of-magnitude loss will, we believe, be manageable
in view of anticipated market-induced demand reductions. Beginning in November,
however, expected supply shortfalls are likely to climb significantly at a time when
seasonal demand is strongest and regional product supply imbalances -- particularly for
transportation and heating fuels -- may be encountered.
GAuserexdiwpdechgb31aug.do/28 August 1990 (23:08)
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00:04
- 5 -
IEA/GB(90)25
If the current crisis continues as it now is, and if global stocks, as well as excess
production and refining capacity are seen to be depleted, we might confront un absolute
physical shortfall situation sometime before the end of the year.
5.
Under these circumstances and given the uncertainties which prevail, it would appear prudent
for Member governments to indicate now that they are prepared to implement additional emergency
measures, including coordinated stockdraw and demand restraint, should the situation so warrant.
II. SUPPLY/DEMAND SITUATION
A. Global Supply/Demand Balance
Supply/Demand Balance 3Q90-1Q91
6.
Table 1 presents a supply/demand balance as prepared before and after the Guif crisis
erupted. The new estimates assume oil prices at US$ 26 throughout the forecast period and of
OPEC crude production rising to 21.6 mbd in October and essentially remaining at that level (Saudi
Arabia at 7.0 mbd).
7.
Higher prices will increasingly have a dampening effect on world oil demand. In 4Q90
and 1Q91, the price induced reduction is some 0.7 mbd (see following section on the impact on
consumption and the economy). With total OPEC production at 23.5 mbd (including NGLs), a
global stockdraw will be required of 2.1 mbd in 4Q90 and 2.4 mbd in 1Q91. This would result
in a stockdraw of about 400 million barrels which could result in severely depleted stocks by
winter's end. Indeed, the figures for 2Q91 show that it would be extremely difficult to replenish
those stocks next spring if the crisis remains unsolved.
8.
It may be possible to squeeze a further 1.0 mbd out of OPEC during the winter and alleviate
some pressure on the implied stockdraw, but that would effectively exhaust supply possibilities.
There is also some doubt as to whether Saudi Arabia could reach 7.5-8.0 mbd; in any event it
might not be possible for a few months. Thus the industry could be strained to near capacity
during the winter under normal weather/operating conditions. Severe weather and/or accidents
would be likely to have significant impact both on prices and physical supplies (particularly
products to consumers).
August 1990 (23:08)
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or 6 -
Table 1
World Oil Supply/Demand Balance1)
End-July Estimate
3Q90
4Q90
1Q91
2Q91
Demand
OECD
37.3
39.6
39.6
37.0
non-OECD
15.3
15.7
15.9
15.4
Total
52.6
55.3
55.5
52.4
Supply
OPEC (incl. NGL)
24.7
24.9
24.3
24.5
Non-OPEC ²
28.4
28.8
28.7
28.9
Total
53.1
53.7
53.0
53.4
Global Stock Change
0.5
(1.6)
(2.5)
1.0
Current (Post-Disruption) Estimate
Demand
OECD
37.4
38.9
38.9
36.4
Non-OECD
15.3
15.6
15.8
15.3
Total
52.7
54.5
54.7
$1.7
Supply
OPEC (incl. NGL)
23.2
23.5(3)
23.5
23.5
Non-OPEC (2)
28.5
28.9
28.8
29.0
Total
51.7
52.4
52.3
52.5
Global Stock Change (4)
(1.0)
(2.1)
(2.4)
0.8
(1)
Outside 'CPEs'
(2) Non-OPEC supply comprises oil production in ORCD and developing countries, CPR net exports and processing gain
(3) Assumes average OPEC crude production of 21.4 mbd ia. other OPEC producers make up two-thirds of the loss of 4.3 mhd of
Iraqi and Kuwaiti oil
(4) Implind global stock change to balance. supply and demand
,
August 1990 (23:00)
1990-08-29 00:07 UCDE_HIE
- 7 -
IEA/GB(90)25
Impact on Consumption and Economic Activity
9. Oil consumption is highest in the fourth and first quarters of each year mainly due to winter
demand for space heating. Most of the seasonal increase occurs in the OECD countries due to their
predominantly northern geographical location. Between the third and fourth quarters of 1990, world
oil consumption was expected to increase by 2.7 mbd, of which the OECD share of the seasonal
increase would have been 2.3 mbd. Due to the effects of higher prices and some transfer of
deliveries forward, the seasonal global increase may only be 1.8 mbd (see Table 1).
10. The ILA Secretariat estimates that an increase in the price of crude oil from $10/hhl to
$26/bbl, if this higher price were to persist until the end of the year, would reduce global oil
demand by about 0.7 mbd in 4Q90. The reduction in oil demand would rise progressively from
0.1 mbd in August to about 0.9 mbd in December and would occur mainly in the OECD area.
Only a small reduction in oil demand in non-OECD arcas would be expected.
11. When prices are rising and are expected to continue to rise, there is the tendency for
producers, wholesalers and distributors, and to a lesser extent consumers, to build stocks. The issue
of primary stocks is discussed elsewhere in this paper. Data on secondary and tertiary stocks are
few and, hence, it is difficult to ascertain the level and behaviour of these stocks. It is quite
possible that there was a buildup in secondary and tertiary stocks prior to, and since the invasion
of Kuwait, as wholesalers, distributors and consumers stocked up due to rising prices. The extent
of the rise of these stocks and the behaviour of wholesalers, distributors and consumers over the
coming months with respect to stocks is difficult to ascertain and predict. The estimate of a net
reduction in global oil demand of 0.7 mbd for the fourth quarter of 1990 is predicated on the
assumption that economic agents are behaving and will continue to behave, in terms of their stock
holding positions, as they have done, on average, in response to crude oil price increases.
12. The projections in Table 1 assume that deliveries were augmented by an extra 0.2 mbd of
extraordinary secondary/tertiary stockbuilding in 3Q90. This was partly offset by a price-induced
decline in demand of 0.1 mbd, resulting in a net gain in deliveries of 0.1 mbd in 3Q90. For the
fourth quarter, global demand has been lowered by 0.8 mbd, of which 0.7 mbd is the price-induced
portion, and 0.1 mbd is that delivered in 3Q90 due to the secondary/tertiary stockbuilding noted
above.
13. If $26/bbl oil were to persist through 1991, world oil demand could be about 1 mbd lower
(a drop of less than 2 per cent from forecast levels). A further $10-$12/bbl increase would reduce
oil demand by an additional 1 mbd (i.e., an additional drop of less than 2 per cent) from what it
was otherwise forecast to be. Such price increases would also have broader economic implications,
affecting both inflation and economic growth, among other things. These impacts will vary for
different countries, depending on their oil intensity, their oil import dependence, any possible
compensating measures taken by governments, and exchange rate fluctuations.
G/useresdwpdoc/gb3laug.dod28 August 1990 (23.08)
1990-08-29 00:10 OCDE_AIE
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IEA/GB(90)25
14. The OECD is analysing the broader economic effects of an embargo related oil price rise
on Member countries. This work will be discussed by the Economic Policy Committee Working
Party No. 3 at its 12 September 1990 meeting. Preliminary estimates indicate that a sustained crude
oil price of $26/bbl in for a year and a half would increase the rate of inflation in OECD countries
on average in 1991 by between 1 and 2 percentage points above previous base forecasts, depending
on monetary policy. At the same time, such a sustained price level would affect the rate of growth
of GDP on average by between 0.3 to -1.0 percentage points from base forecasts. again depending
on monetary policy.
15. The effect of this same price increase among non-member countries, particularly LDCs is
estimated to be even more pronounced. Low income oil importing countries - and especially
Eastern Europe -- will suffer most from the effects of the price rise, through inflation, worsening
terms of trade and losses in real income. Heavily indebted oil importing LDCs will suffer an
increase in debt burden as a consequence of significant interest rate rises resulting from the oil price
hike. In contrast, oil producing LDCs, even if heavily indebted, will benefit from the recent price
increases.
B. Stocks
Company-Owned Primary Stocks in OECD Countries
16. Company-held primary stocks in OECD countries at the beginning of July were estimated to
have been 331 million metric tons or 70 days of forward consumption.¹ Government-owned and
entity amounted to a further 139 million metric tons or 30 days of forward consumption. During
the 1980s, public stocks increased from 47 million tons in 1980 to 139 million tons on 1 July 1990
representing today 30 days of forward consumption. During this period, company stocks declined
by 100 million tons from 432 to 331 million tons reflecting the on-going industry rationalisation
and tight stock management.
Stocks Outside the OECD Reporting System
17. Stocks outside the OECD reporting system (entrepot crude storage in Rotterdam, Caribbean
and Singapore, floating storage and stocks ashore in non-OECD countries) were reported at high
levels at the end of July but there are signs that they have begun to be drawn. Floating storage
declined from 70 million barrels at end-June to 59 million barrels at end-July. In the period from
26 July to 23 August, crude oil and product stocks in independent Caribbean storage (excluding
that owned by Venezuela) fell from 28 million barrels to 25 million barrels. Rotterdam entrepot
crude storage was believed to be full at the end of June at 34 million barrels (4.6 mt), the highest
"This should not be confused with the IEP obligation to hold 90 days of "net imports". In
many countries "net imports" is close to "forward consumption".
August 1990 (23:08)
1990-08-29
00:12
OCDE_AIE
45 24 79 21 2.10
9 -
1)25
recorded. Much of this oil was owned by OPEC producers, principally sold
level would, ever in principle, count against their respective quotas. By the end of Septehort-
term floating storage and traders' stocks in independent storage are expected tolrawn
down extensively. No further drawdown from these sources is expected in the
Overall, reliable information OF commercial stock levels in non-OECD dearce. 40-
18. La the absence of compulsory stock obligations, stocks are believed to represer'e, short-
of consumption. It is undertood that those countries most heavily de oil
45 haul days Kuwaiti and Iraqi supplies (Palstan and India) are already being forced wn
stocks.
The only non-OECD countriesvhich have strategic stocks of oil are Soutrael barrels and
South 19. Korea. Stockpiles in Israel at South Africa, amounting to an estimated
each are unlikely to be drawn dos. South Korean Energy Ministry officered down on
17 August that their strategic stocksf 40 million barrels of crude would begin Kuwaiti
at an unspecified rate. Kukdong, thKorean refiner which has lost 25 kbd of
crude, was apparently allowed to dv from government stocks with immedial
Global Stockdraw Requirems
The requirements for stockw have chifted significantly since the sis began.
Table 20. 2 presents the revised quartesupply/demand outlook with some detail ply changes
in stocks that would be required talance the market through the winter.
Table 2
OILPPLY/DEMAND BALANCE
3Q90
4090
52.7
54.5
Demand
51.7
52.4
Supply
Stock Changes
OECD Commercial
0.1
(2.1)' )'
-
-
OECD Strategic
Non-OECD
(0.1)
(0.1)
)
OPEC/Floating Storage
(0.5)
(0.1)
1)
Oil in Transit
(0.5)
0.2
Total Stock Change
(1.0)
(2.1)
4)
*implied OECD Commercial Stockdrawlance supply and demand.
1990
(23:08)
1990-08-29
IEA/GB(90)25
- 10 -
21. OECD commercial stocks are now estimated to show a small build of 0.1 mbd in the third
quarter, instead of the anticipated pre-crisis build of 0.6 mbd. Thus, companies may begin the
fourth quarter without the benefit of a normal build in the third quarter. The implied stock draw
required of OECD commercial stocks is estimated at 2.1-2.2 mbd for 4Q90 and 1Q91. It should
be noted that this stockdraw is necessary to balance supply and demand but for various reasons may
not occur, especially in 1Q91. It would suggest a level of OECD commercial stocks of around
300 million tons on I January 1990 and 275 million tons on 1 March 1991. It is more likely that
the 1Q91. OECD commercial stock draw will be closer to 1.3-1.4 mbd in 4Q90 and approaching less in
III. SUPPLY DISRUPTION ASSESSMENT
A.
Disruption of Iraqi and Kuwaiti Oil Supplies
22. IEA/GB(90)23 contained two supply disruption scenarios. Given the manner in which
responses to the Gulf crisis have evolved during the past three weeks, however, this paper will
treat only one -- the "most likely" of these two scenarios. This is a supply loss of 4.3 mbd
from September now projected through December 1990, as the result of the removal from the
market of Kuwait's entire petroleum production, including NGL/condensates, and an effective
embargo of all Iraqi oil exports with the exception of those small amounts (less than 40 000 bpd)
to Jordan. It should be noted that our new figures estimate a somewhat higher loss of supplies
(1.4 mbd) in August than that presented in the earlier paper. This is due to a more precise
estimate of tanker travelling times for immediate pre-embargo Kuwaiti and Iraqi shipments.
23.
Table 3 shows the anticipated supply reductions and expected supply increases by source
through December which are now projected as likely to result from the current situation. The
data are presented on an arrival basis. Projected net supply reductions take account of commercial
stock changes and do not reflect results of either market forces or government actions which
restrain demand, or of the potential effects of government stock draws.
24.
Anticipated OPEC production increases, which are explained later in this document, now
seem to. be forthcoming, although somewhat slower than originally thought. This has affected most
particularly the August and September OPEC supply increases indicated in Table 3. There continue
to be indications that some OPEC countries possessing surge capacity would like to see a signal
of willingness from major consuming countries to draw stocks, and thus to share with them the
to responsibility for compensating supply shortfalls. Conversely, other producer states appear eager
in exploit current high prices. These producer "price hawks" are less interested, for the time being,
seeing releases of OECD government stocks.
August 1990 (23:08)
1990-08-29 00:17 OCDE_AIE
45 24 19
- 11 -
IEA/GB(90)25
Table 3
IMPACT OF OIL SUPPLY DISRUPTION
(million barrels per day crude oil equivalent)
August
September
October
November
Supply Loss1
Kuwait
0.5
1.6
1.6
1.6
Iraq
0.9
2.7
2.7
2.7
Total Supply Loss
1.4
4.3
4.3
4.3
Supply Increase1
Production- OPEC
0.2
1.3
2.9
2.9
- other non-OECD
0.1
0.1
0.1
-
Total
Production Increase
0.2
1.4
3.0
3.0
Stockdraw3
.
0.4
0.2
--"
--"
- OPEC
- other non-OECD
0.5
0.6
-
-
- OECD Company
0.3
1.6
0.5
0.34)
Stockdraw Increase
1.2
2.4
0.5
0.3
Total Supply Increase
1.4
3.8
3.5
3.3
Net Supply Change"
0.0
0.5
0.8
1.0
(Potential Market-Induced
Demand Reduction)*
+0.1
-0.3
-0.7
-0.8
IEA Government Encouraged
Oil Saving and Replacement' -0.1
-0.5
-0.5
-0.5
1) Expressed on arrival basis at destination; disruption to August exports will therefore be reflected only
partially in August arrivals. Assumes effective embargo on Iraqi oil.
2) Arrival basis.
3) Sensitive to price expectations and movements in secondary product stocks.
4) These stockdraw figures differ from those shown in Table 1. Stockdraw figures in Table 1 are
theoretically to balance supply and demand.
5) Before any adjustment due to demand changes.
6) Demand changes due to higher oil prices and some immediate secondary and tertiary stock building.
7) This includes: voluntary and mandatory demand restraint, postponement of strategic stock purchases, fuel
switching in electricity generation, and some OECD oil production increases.
8) The higher than initially expected draw of floating storage in 3Q90 could negatively affect OPEC's ability
to draw stocks in 4Q90.
August 1990 (23:08)
1990-08-29
00
18
IEA/GB(90)25
- 12 -
25. In August, the 1.4 mbd supply loss is evenly balanced by only 0.2 mbd of production
increases combined with 1.2 mbd of non-governmental stockdraw. Part of this necessary stockdraw
comes from a run-down of OPEC-owned oil stocks ashore and in floating storage ("short-haul
crude"). The rest of the draw comes from commercial company stocks, both inside and outside
the OECD. We should soon have first empirical data indicating the relative stockdraw¹ of IEA
countries in August.
26. For the period September through December our scenario projects a constant total supply
loss for each month of 4.3 mbd. It is anticipated, however, that this loss will be offset or
partially offset - by a market dynamic which will change from month to month. In September.
2.4 mbd of the supply loss will be made up of stock draw, while only 1.4 mbd of supply increases
are anticipated as the result of the slow start in OPEC surge production. Conversely in October,
the composition of the offset shifts significantly with 3.0 mbd of OPEC and other non-OECD
production increases and a much lower stockbuild. Thus, the table indicates our belief that
companies' capabilities to continue drawing at relatively high rates will diminish over time as more
and more of them approach either government-mandated stock levels or their minimum operating
requirements (MOR). Towards the end of October, commercial stocks could be drawn down to
critical levels in some regional markets and countries if the current situation prevails. In certain
countries, these levels may be reached even earlier, while others will have comfortable stock levels
for much longer periods (see later pages for a full discussion of this aspect). From end-October
onwards, therefore, the size of the net supply shortage, as shown in Table 3, will become more and
more dependent on the willingness and the physical ability of several OPEC countries to increase
their production. Initially OPEC floating storage had been expected to be drawn over the second
half of the year with a stronger draw in 4Q90. All of this is now expected to have occurred by
the end of September.
27. In sum, we now expect a manageable situation in September and October. This view is
based upon anticipation of significant increases of supplies from some OPEC countries in
combination with company stock draw. Table 3 shows the remaining net supply reduction for
September projected as a relatively small 0.5 mbd. This is, however, expected to rise to 0.8 mbd
in October and 1.0 mbd in November. Part of this supply shortfall will be compensated in 4Q90
and later periods by price-induced demand restraint. Should the situation which actually develops
vary significantly from the one here projected -- in particular, should additional supplies from OPEC
not materialize - the remaining global net supply shortage would be considerably larger than
indicated in September and October. In such a situation, government action would become
necessary, but the composition and extent of such action will depend on the degree of shortfall then
foreseen.
28. Thus, the "manageable" September/October projection given here should not be considered
a "comfortable" projection. There is no room whatsoever for complacency in the current situation.
1
Data in Table 4 reflect the changes between the projections in the end-July Oil Market Report and the revised estimate as
shown in Table 1.
August 1990 (23:08)
1990-08-29 00:21 OCDE_AIE
45 24 79 21
P.14
- 13 -
IEA/GB(90)25
The market over the next two months can be likened to an acrobat upon a flying trapeze. The
acrobat will perform smoothly if the moving parts of the trapeze remain synchronized. Should
commercial stock draws and short-haul crude inputs not move out and meet surged OPEC
production, the safety net provided by our emergency measures may unavoidably need to be used.
B.
Supply Responses Outside OECD
OPEC Production Capacity and Responses
29. Table 4 gives an estimate of OPEC crude production from July to October 1990. It
includes an estimated measure of how now production could be brought on-line within one month.
and up to three months hence. Within OPEC -- and excluding Kuwait and Iraq -- up. to 4-4.5 mbd
spare crude oil production capacity exists. This could more than compensate for the entire current
loss of Kuwaiti and Iraqi oil. Most OPEC spare capacity resides in Saudi Arabia and Venezuela.
Outside OPEC. the potential is relatively limited since fields in most countries are currently
producing the maximum levels. The degree of speed with which OPEC spare capacity will be
activated in coming months is, of course, primarily a political question to which some affirmative
answers have already clearly been given. Nevertheless, to utilise all sustainable capacity, some
producing countries will have to de-mothball shut-in fields and associated facilities. This will
require some extended work, and corresponding time lags have therefore been introduced in
Table 4.
30. OPEC maximum crude oil production available within about one month, excluding that in
Iraq and Kuwnit, is estimated to be 21.4 mbd. Within 23 months the productive capacity could
be as high as 23.3 mbd, but output levels necessary to maintain this figure might not be sustainable
in all countries, and in others it could entail the production of grades which will be difficult to sell.
OPEC's short-term production capacity, assuming an effective Iraqi embargo, is about 22 mbd.
Other published estimates range from 21.5 to 22.2 mbd.
31. There is currently little prospect of a co-ordinated or collectively agreed increase in OPEC
crude production. It is uncertain at the moment whether or not a consensus is achievable in
support of Venezuela's and Saudi Arabia's call for output increases. Each OPEC member country
may find itself obliged simply to act unilaterally or collectively with other 'like-minded' producers.
As noted, any increases in crude oil exports will not be immediate due to technical constraints
associated with raising wellhead output, and also the need to arrange transportation. There is
naturally a further lag between raising exports and the arrival of the oil at refineries. Since most
spare capacity is in the hands of long-haul Gulf producers, this lag alone would be in the range
of 10-35 days.
August 1990 (23:08)
1990-08-29
00:23
OCDE_AIE
45 24 79 21
IEA/GB(90)25
- 14 -
Table 4
OPEC CRUDE OIL PRODUCTION AND Capacity
(million barrels per day)
Production
Capacity Available
OPEC
August
September October
in
within
Quora
July
(estimute)
(vetimate)
(extimate)
1 Month 2-3 months
Saudi Arabia
5.380
5.4
5.45
6.7
7.0
7.0
7.5 8.0
Iran
3.140
2.9
3.3 2
3.2
3.2
3.2
3.3
Iraq
3.140
3.2
0.9
0.4 3
0.41
[3.5]
[3.5]
UAE
1.500
2.0
1.6
1.9
2.0
2.2
2.4
Kuwait
1,500
1.6
-
-
-
[2.0]
[2.3]
N. Zone
0.3
0.25
0.25
0.25
0.3'
0.3'
-
Qatar
0.371
0.4
0.4
0.4
0.4
0.5
0.5
Nigeria
1.611
1.7
1.75
1.8
1.9
1.9
2.0
Libya
1.233
1.3
1.35
1.4
1.4
1.4
1.5
Algeria
0.827
0.8
0.8
0.8
0.8
0.8
0.8
Gabon
0.197
0.3
0.3
0.3
0.3
0.3
0.3
Venezuela
1,945
2.0
2.0
2.3
2.3
2.4
2.5
Ecuador
0.273
0.3
0.3
0.3
0.3
0.3
0.3
Indonesia
1.374
1.3
1.3
1.3
1.3
1.3
1.4
Total Crude Oil
22.491
23.3
19.7
21.1
21.6
21.4
22.8 23.34
NGL/Condensate
1.9
1.8
1.9
1.9
Total Production
25.2
21.5
23.0
23.5
(1) Production based on observed export liftings, excludes sales from floating storage and stocks in consumer countries.
(2) Excludes about 0.3 mbd stockdraw of crude eshore and aflont.
(3) Assumes effective embargo with production to meet domestic consumption.
(4) Excludes Iraq and Kuwait.
(3) Excludes onshore production.
August 1990 (23:08)
1990-08-29 00:24 OCDE_AIE
45 24
If 15 -
IEA/GB(90)25
32. It now appears reasonable, based on the latest available information (27 August), to assume
the following OPEC country crude oil production increases versus the production quotas agreed
on at their 27 July meeting:
mbd
September
October
November
December
Saudi Arabia
1.3
1.6
)
Venezuela
0.3
0.3 }
UAE
0.3
0.4 }
as in October
Nigeria
0.2
0.2 )
Libya
0.1
0.1
)
Iran
0.2
0.2 }
Total
2.4
2.8
2.8
2.8
33. The Secretariat has learned that Venezuela raised its production to 2.2 mbd in mid-August
and that this will reach 2.3 mbd by end-August, thereby filling its available storage capacity in
Venezuela and the Caribbean. Iran has also raised its production to an estimated 3.3 mbd. Libya
too is estimated to have started to lift production somewhat. Other OPEC countries such as
Indonesia and Gabon appear willing to increase their output but their added contributions will by
definition be small. Higher NGL and condensate production in Saudi Arabia is also expected to
make up for corresponding lost production in Kuwait.
34. The confusion over September nominations for Saudi crude oil serves to identify two
important features of any increase in Saudi oil production. Firstly, internal consumption in Saudi
Arabia will rise considerably under current circumstances; and secondly, Saudi Arabia is likely to
reserve 0.2-0.3 mbd of higher crude oil exports for KPC for its European refining system. It may
as well set certain amounts aside for countries such as Pakistan, which are in great need of
replacements of lost Kuwaiti supplies and which have assisted in the defence of Saudi Arabia.
Response Capabilities of Non-OPEC/Non-OECD Countries
35. The scope for higher production from non-OPEC producers outside the OECD in response
to either a physical shortfall or higher prices is strictly limited. We estimate that it will be 0.1-
0.2 mbd over the remaining months of the year. It has been expected for many months that
production from the non-OPEC developing countries would rise through 2H90 to reach a level of
almost 10.0 mbd in 1Q91, 0.1-0.15 mbd above the average of 9.85 mbd in 1H90. These
projections (which include NGLs) and non-conventional oil) have not been substantially changed.
36. Mexico, the largest non-OPEC oil producer, has announced its intention to increase exports
by 100 kbd, principally through an increase in deliveries to Spain, Korea, Israel and the U.S. This
August 1990 (23:08)
1990-08-29 00:27 OCDE_AIE
45 24
IEA/GB(90)25
-- 16 -
increase will be achieved in part by drawing on stocks and is likely to be short-lived. The Increase
in production is likely to be considerably smaller. In June 1990, the last month for which data is
available, Mexican crude production slipped further to 2.45 mbd, the lowest level for two years.
37. Modest increases in production have been announced by Malaysia (10 kbd) and Colombia
(30 kbd). Small-scale unannounced increased are expected elsewhere either to take advantage of
higher prices or to mitigate the loss of imports, for example in India and Brazil.
C. Commercial Supply Responses Inside OECD
UK North Sea Production
38. On 21 August, Chevron and British Petroleum announced that they had decided to postpone
the non-essential maintenance work on the Ninian System, scheduled for September, until next
spring. Shell Expro, the Shell/Exxon joint-venture operating company, announced also that the
major shutdown of the Brent system in October will be put back several weeks. Installation of
emergency shut-down valves on the platforms in the Brent system will still have to be completed
by the end of the year unless the UK government were to relax the existing 31 December 1990
deadline. The scheduled maintenance programme which began in early July was expected to depress
UK crude oil production through to early November. From an estimated 1.9 mbd in the first six
months of this year (well below the notional capacity of 2.1-2.2 mbd because of persistent
problems) production was expected to be 1.6 mbd in 3Q90 recovering to 1.85 mbd in 4Q90.
Production in both September and October was not expected to exceed about 1.5 mbd.
39. There have in recent weeks been five one-day unofficial strikes by maintenance workers,
ostensibly over union recognition and safety standards. Current production, which is under the
control of the operators' own employees, has not been affected but the industrial action has caused
a further slippage in the maintenance programme and expected delays in the start-up date of fields
which had been out of production.
40. The effect of the above announcements will be to increase UK production in September to
about 1.8 mbd. More importantly, it promises to increase the number of Brent cargoes in
September from 20 to 35, still below the 38 in August but sufficient to alleviate the fears of a tight
North Sea market in the period 10-30 September. (Since 1 August, production from all fields in
the Brent and Ninian systems have been co-mingled and delivered as Brent Blend). Since Brent
has a key role as a reference grade in the Atlantic Basin, alleviation of the potential supply squeeze
in September will at the same time indirectly alleviate price pressure on all other crude grades.
Commercial Stockdraw
41. The end-July Oil Market Report forecast an OECD company stockbuild of 0.6 mbd in 3Q90
and a stockdraw of 1.0 mbd in 4Q90. The stockbuild in 3Q90 was assumed to be somewhat
G:\useresdpdoc/gb31aug.dod/28 August 1990 (23.00)
1990-08-29
00:29
OCDE_AIE
45
- 17 -
IEA/GB(90)25
lower than normally due to the comfortable company stock position on 1 July and in view of the
expected close adherence of OPEC countries in 3Q90 to the new production quota. Nevertheless,
some stockbuild in 3Q90 was considered to be necessary to cope with seasonally higher winter
demand.
42. We now estimate that OECD company stocks at the end of 3Q90 will be about the same
as on 1 July 1990. This stock level would provide at the And of September a coverage in days
of forward consumption of around 67 days. This represents about the same degree of days forward
consumption coverage as at the end of 3Q89. While this situation still seems to be feasible, it can
not continue for very long. The supply/demand situation as described in Table 1 would require a
theoretical company stockdraw in 4Q90 of 2.1 mbd (as compared to 1.0 mbd projected in the end-
July Oil Market Report) or down to a forward consumption coverage of only 60 days -- a level
never reached before, as shown in the following table.
Table 5
COMPANY STOCKS IN DAYS OF FORWARD CONSUMPTION
1 January 1 April r July 1 October
1980
76
85
92
88
1981
80
91
92
82
1982
82
84
87
85
1983
82
80
78
75
1984
71
73
76
75
1985
72
73
72
68
1986
68
68
70
73
1987
69
70
67
70
1988
69
69
69
67
1989
65
67
67
66
1990
64
70
70
67*
1991
60*
59*
* Estimated
43. If commercial stocks are required to absorb the expected loss of supply not compensated for
by higher OPEC and non-OPEC production, they will begin to reach critical levels in the 'fourth'
quarter as many companies reach legal minimum stock levels (or in certain exceptional cases
minimum operating levels). The position is, of course, more complex than that outlined above
since the degree of forward consumption coverage afforded by commercial stocks varies
considerably from one OECD country to another, as does the stringency of IEA/EEC minimum
August 1990 (23,08)
1990-08-29
00:31
IEA/GB(90)25
- 18 -
requirements. Some countries which had less than five days of discretionary commercial stocks at
the beginning of July will perhaps reach their minimum legal levels in September; others will no
doubt be able to draw down commercial stocks until the end of December.
IV. EMERGENCY RESPONSE CAPABILITY OF IEA/OECD
COUNTRIES
44. In IEA/GB(90)23, the Secretariat reviewed the potential of IEA countries for stockdraw,
demand restraint, fuel switching and surge crude oil production. The overall response capacity as
presented in that note was broadly confirmed at the SEQ meeting of August 16th and in bilateral
discussion with administrations. The present chapter takes the analysis a step further in moving
from a global approach to an examination of potential country by country. This is done on the
basis of three illustrative assumptions on the loss of supplies to the OECD - 1.5 mbd, 2.5 mbd
and 3.5 mbd. These three assumptions are not linked to specific scenarios.
45. Nine tables (three sets of Tables 10a through 10c from the CERM Manual) shown in
Attachment I present response capabilities reported by Member countries for the months of
September, October and November on the basis of the three assumptions. The following section
examines overall emergency response capability on the basis of the individual country data
submitted.
46. Caveats have been attached to the data by some countries. These are shown in the country
notes which follow the tables and must be taken into account in interpreting the data. Many of
them refer to conditions which have to be fulfilled under national legislation before certain types
of measures can be implemented or the fact that the data do not indicate commitments of any kind.
In some cases, countries emphasised that data submitted were tentative and subject to revision. In
general, however, data submitted appear to be consistent with countries' oil demand structures,
legislation and approaches to crisis management. While individual items of information may be
subject to query, the overall picture of the IEA's emergency preparedness at the three hypothetical
levels of disruption provides a useful general guide to Member countries' potential in case of need.
A.
Demand Restraint Measures
47. Over the period September to November 1990 the importance of demand restraint measures
in the total IEA response to the three supply reduction assumptions reflects administration policies
and attitudes towards management of the shortages as a mild disruption and requires strong
measures such as government stockdraw. In the event of the 1.5 mbd shortfall, demand restraint
measures amount to 43 per cent to 47 per cent of total IEA responses, but only for 35 per cent
to 37 per cent in the 2.5 mbd shortfall and 24 per cent to 29 per cent in the event of the 3.5 mbd
shortfall. Stockdraw measures are the main compensating element as the supply reduction becomes
O:userexdhwpdocrgb3laug.do\28 August 1990 (23:08)
1990-08-29 00:33 UCDE_HIE
- 19 -
IEA/GB(90)25
more serious. It seems probable that consideration of a longer period or deeper disruption might
have influenced administrations somewhat more in the direction of demand restraint in an effort to
conserve stocks.
48. Similar considerations have doubtlers influenced Member countries in their choice of
"persuasion" as the main measures, accounting for more than half of all demand restraint under all
three scenarios. Germany and Japan will rely entirely on persuasion, while the United States
envisages using some "other compulsory measures" after the first month in all three cases. Many
countries have assumed that price increases would underpin persuasion effects. Although the United
States would envisage other compulsory measures, persuasion would nevertheless make the greatest
contribution to demand restraint efforts, thanks mainly to a reduction in gasoline demand. In most
countries, in fact, the transport sector is a main target for demand restraint. This is hardly
surprising since its importance has risen from about one third of demand in the mid-1970's to one
half at the end of the 1980s.
49. "Rationing/Allocation" and "Other Compulsory Measures" count for a rather weak second
place in the importance of the various demand restraint possibilities. While Canada uses
rationing/allocation throughout, Belgium, Ireland, the Netherlands and Spain would also foresee
taking these measures in the more serious shortfalls. Other compulsory measures envisaged later
by the U.S. are planned to be effective immediately by Sweden, Australia and Spain in the 4 per
cent scenario, followed by the Netherlands, Italy, Portugal and New Zealand in the 7 per cent and
10 per cent cases.
50. "Fiscal Measures", while generally not popular among the demand restraint options, are
planned by Demmark, Portugal, Turkey and Greece, varying with the Importance of the shortfall.
51. The considerable variation in the approach to demand restraint among countries has to be
seen against a similar diversity of national attitudes and traditions, administrative procedures and
powers of central government. The fact that a measure looks weak or implausible in one national
context may not be an accurate guide to its efficacy in another.
B. Emergency Reserves
52. Table 6 shows the overall stock position of IEA and OECD countries on the 1st of
July 1990. For the ORCD as a whole, the level was higher than a year earlier at 9470 million
metric toms following ultusual stockbuilding in the first quarter continuing into the second quarter.
Some 200 million tons of this was products and 270 million tons of crude oil. This represented
about 150 days of net Imports and 100 days of forward consumption. The implications of this for
market developments are discussed above. The present section considers the data from the
viewpoint of emergency response.
August 1990 (23,08)
1990-08-29 00:36 OCDE_AIE
45 24 (3
IEA/GB(90)25
- 20 -
C. Industry and Public Stocks
53. The crude oil stocks of 270 million tons mentioned above are split fairly evenly between
public and industry stocks. Public stocks are dominated by the U.S. SPR, German EBV and
Federal Crude Oil Reserve and the stocks of the Japan National Oil Corporation. They consist
mainly of crude oil (125 million tons) but include 14 million tons of products. Industry stocks,
on the other hand, contain more product (161 million tons) than crude oil (137 million tons). From
the viewpoint of emergency response, the implications of this are important. In general, industry
product stocks are available for immediate delivery while public crude oil stocks are subject to
release procedures and refining delays. On the other hand, crude oil can be used flexibly to
produce varying proportions of products to meet seasonal demand and to respond to possible
imbalances produced by demand restraint (e.g. proportionately more savings of heavy fuel oil than
middle distillates).
Public Stocks
54. Attachment I shows that, under three assumptions, Austria, Denmark, Germany, the
Netherlands and the U.S. indicated that their government and/or other public stocks could be used.
Japan also holds considerable public stocks but considers industry stockdraw more appropriate for
the early stages of a supply disruption.
-
55. Under the three assumptions, the reported total public stockdraw accounts for about
0.02 mbd, 0.5 mbd and 1.0 mbd, respectively, for the three month period, while the reported total
stockdraw accounts for about 0.2 mbd, 0.9 mbd and 1.7 mbd. As the average of three month
period, the public stockdraw represents about 10 per cent, 57 per cent and 60 per cent of total
stockdraw, for the three assumptions.
56. Under the three assumptions, should the reported stockdraw response measures be taken,
remaining public stock level at the end of November would be, approximately, as follows:
(million tons)
Shortfall
North America
Pacific
Europe
1.5 mbd
79
28
31
2.5 mbd
75
28
30
3.5 mbd
69
28
29
57. The only major impact is, therefore, in North America. That in Europe is significant while
no public stocks are used in the Pacific.
August 1990 (23:08)
Table 6
STOCKS ON LAND IN IEA COUNTRIES: I JULY 1990
("millions of metric tons" or "days")
Total Shocks
Company Stocks
Government Constrolled Smith
Crade Oil
Products
Public Stock
Crade Oil
Products
Total Stocks
Days Forward
Days '89 Net
Crade Oil
Product
Company
Consumption
Imports
62-80-0661
Stock Total
Total
6.1
9.*
15.8
70
1
-
6.1
15.8
-
-
9.7
795
136.7
63.1
200.1
93
196
57.2
63.3
120.6
795
-
795
1425
73.0
215.9
91
196
TERICA
63.3
73.0
136.4
79.5
-
00:38
-
22
35
S.T
64
324
12
35
5.7
-
-
61.4
ISUP
77.1
127
118
33.2
15.7
48.9
28.2
-
28.2
0.5
10
84
179
1
9.4
10
-
1
0.4
9.6
-
55.7
28.2
28.2
193
B.P
113
124
641
-
35.9
19.8
03
1A
27
$6
94
03
1.3
1.0
23
-
14
1.1
32
4.5
52
93
-
-
1.1
3.7
4.5
-
4.7
185
505
4X
22
29
-
13
1.5
0.7
0.7
20.7
IS=
39.1
122
141
5.7
75
13.2
15.0
10.9
26.0
21 : I
20
4.5
III
130
-
1.7
1.7
28
45
-
-
at
1K.
11
98
104
-
LO
L1
-
0.1
i
21.4
88
97
5.8
14.8
20.6
04
0.4
as
6.1
150
R
03
N
78
-
-
-
03
a3
-
-
6.7
Ll
L2
23
29
3.
90
9:
239
1.9
4.5
3.2
L'
45
187
-
-
3.2
45
-
12
-
97
27
1
1.2
Li
27
$5
-
L2
15
I
41
16
9.7
74
83
-
-
4.1
5.6
9.7
-
45 24 79 21
61
-
0.2
19
C
6.4
170
159
1.7
4.4
0.2
03
7
5.6
162
139
03
5.6
1
-
5.3
-
-
23
L3
3.6
59
66
13
16
-
-
23
6.8
The
17.2
79
-
-
-
6.8
10.4
17.2
-
dom
17.0
54.5
57
137.2
100
121
37.5
68.3
105.8
14.4
31.4
139.1
261.4
17:5
437.0
93
151
14.4
L
136.7
161.2
297.8
124.7
6
3.4
12
-
I
I
1.9
IEA/GB(90)25
P.22
1.9
1.6
3.4
I
150
14.6
86
I
I
7.6
19.6
-
120
-
7.6
139.1
270.9
19th
470.4
100
-
TAL
146.1
185.2
331.3
124.7
14.4
1990-08-29
00:40
UCDE_HIE
IEA/GB(90)25
- 22 $
Industry Stocks
58. Company held stocks in OECD countries as of 1 July 1990 are estimated to have been
331 million metric tons, corresponding to 70 days of forward consumption and 70 per cent of total
OECD stocks. Company stocks were somewhat higher than they had been at the same time last
year as companies had generally been increasing crude oil stocks during the first half of the year.
The company stockbuild averaged 1.2 mbd during this time (1.0 mbd crude and 0.2 mbd products),
and company stocks are estimated to have been 15 million metric tons higher on 1st July 1990,
than at the same time in 1989.
59. Although total stock levels have increased continuously since 1974, this reflects the build up
of government-held public stocks. Company stock levels, on the other hand, particularly product
stocks, have declined significantly during this time. Total company stocks have declined from a
level of 427 million metric tons and 92 days of forward consumption on 1 July 1980 to
331 million metric tons and 70 days of forward consumption on 1 July of this year. It will be
seen in the graph below that company crude stocks have remained at rather steady levels while
product stocks account for most of the decline.
60. The coverage of product stocks held by companies had declined significantly in the last
decade. This reflects tighter stock management as part of a general drive to cost-cutting, but is due
also in part also to a reduction in industry stockholding obligations as governments build public
strategic reserves. In considering the level of accessible stocks or potential company stock
drawdown rates, composition of stocks becomes an important element. As will be seen from the
table below, although total volume of company inventories were in a stronger position just before
the supply disruption than the previous year, product stocks were still at reduced levels. This
confirmed the long-term trend towards lower product stocks but may also reflect bottlenecks here
and there as refinery capacity was being used to near capacity.
August 1990 (23.08)
1990-08-29 00:42 OCDE_AIE
45 24 79 21
- 23 -
IEA/GB(90)25
Table 7
INDUSTRY STOCKS IN OECD COUNTRIES
1 JULY
million metric tons
Days of Forward Consumption
Crude
Product
Total
Total
1975
142.8
240.3
383.1
87
1980
169.3
257.6
426.9
92
1985
136.9
173.9
310.8
72
1989
136.0
179.2
315.2
67
1990 146.1
185.2
331.3
70
Table 8
INDUSTRY STOCKS IN OECD REGIONS
DAYS OF FORWARD CONSUMPTION COVERAGE
1ST JULY
North America
Pacific
Europe
Total QECD
1975
75
78
108
87
1980
84
94
103
92
1985
64
86
78
72
1989
60
73
76
67
1990
62
79
78
70
Accessible Stocks
61.
In relation to stockdraw potential, it is important to have an order of magnitude of
accessible stocks of industry in excess of the legal requirement of IEA/EC obligations and minimum
operating requirements. The Secretariat has calculated such accessible stocks in the following way:
i)
Mandatory obligations were computed under the IEA/IEP and EC requirements,
using whichever was higher in countries where both apply:
1990
(23:08)
1990-08-29
00:43
IEA/GB(90)25
- 24 -
ii)
Minimum Operating Requirements were calculated using data submitted for SEQ
purposes in 1987 and adjusted for the demand increase since that date:
iii)
Maximum "theoretical" accessible company stocks were calculated under the
condition that a decision to release government stocks had not been reached. This
was based on 1 July 1990 company stock levels and represents the volume of stocks
available above MOR and ensuring mandatory stockholding requirements be met.
MOR is relevant only in the case of industry stocks. Public stocks are available
to the full for use in emergencies, subject only to holding the legal minimum of
emergency reserves; and
iv)
Additional accessible government stocks were calculated to indicate volume of
government held public stocks which could be drawn above this level of company
stockdraw, again if mandatory requirements have not been reduced.
62.
It is estimated that a volume of 62 million metric tons (466 million barrels) of company
stocks could be accessible for the IEA countries as a whole. This is the calculated total volume
of total oil available while maintaining minimum operating requirements (MOR) or mandatory
stockholding requirements, whichever is higher. There would be an additional 95.2 million metric
tons (690 million barrels) of Government controlled public stocks available if this full volume of
company stocks were drawn and mandatory stockholding requirements not reduced. While this is
the theorctical maximum level of "accessible" stocks, its composition may not necessarily
correspond well to demand by region and product at a particular time.
Table 9
ESTIMATED ACCESSIBLE STOCKS'
IEA Total
(as of 1st July 1990)
Total Stocks
Accessible Stocks
Total
Company
Government
Total
Mandatory
Company
Government
Stocks
Stocks
Stocks
Obligations
MOR
Stocks
Stocks
million metric tons
297.8
139.1
436.8
251.1
199.1
62.3
95.2
147.5
million barrels
2 263
1 030
3 293
1 845
1 377
466
690
1 156
Note: Data in this table are not additive since underlying country data are estimates on the basis
of individual MOR and mandatory obligations.
'See paragraph 61 for how Accessible Stocks are calculated.
August 1990 (23:26)
1990-08-29 00:45 OCDE_AIE
45 24 79 21
P.26
- 25 -
IEA/GB(90)25
Maximum Stockdraw Rates
63.
From these calculated accessible stocks, a maximum commercial stockdraw rate was
determined for each IEA region. The following stockdraw rate is calculated assuming the
"accessible" company stocks would be completely drawn to MOR or mandatory requirements.
Table 10
THEORETICAL MAXIMUM COMPANY(1) STOCKDRAW
(mbd)
1 August 1990 - 1 January 1991
Feedstocks and
Crude/NGL
Refined Products
Total Oil
N. America
0.5
0.4
0.9
Pacific
0.7
0.4
1.0
Europe
0,7
0.3
1.0
Total IEA
1.9
1.1
2.9
(1)
Assuming mandatory requirements not reduced and MOR met.
64.
While industries stocks could theoretically be drawn down at the 3 mbd rate suggested by
the Table, it must be emphasised that this would exhaust all stocks down to 90 day mandatory
requirements and MOR. With the many exception being the U.S., the mandatory requirement flaw
would be hit well before MOR. In most other countries, therefore, MOR would not be a constraint
unless mandatory obligations were lowered.
D.
Surge Production
65.
The salient feature of surge production IEA countries is inflexibility. Little increase in
output is available and the small margin increase activated at the outset of a crisis does not increase
as the shortfall grows.
66.
The total capacity for surge production is limited: for all three cases and the three periods,
it is roughly equivalent to 200,000 b/d.
67. Reflecting this inflexibility, surge production takes a progressively smaller share of the total
response in a worsening shortfall cases: from a 15.3 per cent share in case of a shortfall of only
4 per cent of the BPFC II (base period final consumption), it falls to a share of only 6.6 per cent
in the case of a 10 per cent shortfall.
Oluerexdwpdocrgb31aug.dec\28 August 1990 (23:08)
1990-08-29
IEA/GB(90)25
- 26.
68. Canada, United States, New 7ealand dispose of small amounts of surge capacity. Neither
Norway nor the United Kingdom are in a position to increase production above planned schedules
in the next three months.
E.
Fuel Switching
69. Fuel switching covers a large portion of the total response to a shortfall of limited size,
In a fuel switching share of the total response) against the per cent shortfall, it can be seen that
fuel switching share of the total response rapidly decreases with an increase of the shortfall.
70.
The fuol switching response is roughly constant over time, evidencing the effectiveness of
this kind of measure in the immediate future: a certain capacity of fuel switching is of a "stand-
by" nature and can be switched on immediately. High oil prices would provide an incentive for
switching and underpinning government guidance or instructions.
71.
The fuel switching capacity immediately available lico mainly in power generation, allowing
a reduction in heavy fuel oil consumption. The fuel oil so made available would change the
pattern of the shortage product slate, and giving incentive to the processing Industry to increase,
if available, its rate of conversion plant utilisation and the severity of certain refinery operations
able to upgrade heavy fuel into more profitable (and needed) fractions.
72.
The above-mentioned effect would aggravate problems resulting from replacement of
Kuwaiti and Iraqi crude or with Venezuelan, Mexican and (to a certain extent) Iranian crudes oil
of lower API gravity and higher sulphur. This could increase pressure on refinery conversion
capacity and high severity operations. These two factors (increased fuel oil availability and
displacement toward the heavier side of the world average barrel of crude) would cause strains in
the downstream refinery operations. Nevertheless, the oil industry should be able to face,
increasingly in a worsening shortfall scenario, this heavier load, because there is a trade-off between
refinery capacity and severity of conversion operations. A plant can convert a bigger proportion
of heavy products into lighter ones at the price of some drop in overall output.
73.
Only a fraction of the total fuel switching capacity theoretically available would be used
in the cases presented. [Additional spare capacity remains available, and could be probably used
in cases of prolonged crises. This might include, for example, mothballed installations.
74.
The maximum total fuel switching response being shown in the table is approximately
43 000 toe/d or, roughly, 300 000 b/d. Information received from administrations suggests a fuel
switching contribution of up to 400 000 b/d could be expected in the medium term, in case of a
long lasting crisis.
August 1000 (13.02)
1990-08-29
00:50
- 27 -
IEA/GB(90)25
F.
Summary of Possible Responses
75.
The country responses above can now be summarised in terms of total response to the range
of disruption considered. The basic data are presented in Table 11. This shows for the months
of September, October and November the ranges of response to the lower and upper supply loss
assumptions. Against these are set Secretariat estimates of technical maxima for a period of some
months based on data prepared for CERM II and other SEQ work on emergency response. The
following conclusions emerge:
i)
Use of IEA surge capacity quickly builds up to its capacity (approximately
200 000 b/d) and may even diminish somewhat over time because, for example,
maintenance can be postponed for some weeks or months but not indefinitely;
ii)
Similarly the switch from oil to other fuels in electricity generation results in a
once-for-all effect which is significant (roughly 300 000 b/d) but cannot be increased
quickly. Fuel switching could increase the availability of heavy products already
in abundant supply, depending on the availability of upgrading capacity at refineries;
iii)
Use of industry stocks is emphasised in some country data in September, phasing
out gradually in the ensuing months as public stockdraw is stepped up. In both
cases, the maximum rate of drawdown appears modest in relation to the Secretariat's
estimates of maximum drawdown rates sustainable for some months; and
iv)
Demand restraint is assumed by countries to make a relatively small contribution
to meeting total shortfall over the range considered for the three month period. A
longer period of shortfall would probably result in greater emphasis on demand
restraint in some countries. The level of savings suggested, even at the top end of
the range, is much below the response potential of countries estimated in the context
of CERM Test II and other SEQ exercises.
76.
Overall, allowing a wide margin for caveats and estimates based on sometimes fragile
assumptions, the response required even in the 3.5 mbd case, appears entirely manageable.
ClesorexdAwpdoagh3lang.doe28 1990 (23:19)
Table 11
SUMMARY OF POSSIBLE RESPONSES TO HYPOTHETICAL OIL SUPPLY LOSSES
IN THE RANGE OF 1.5/3.5 MBD TO THE OECD AREA'
IEA/GB(90)25
Secretariat estimate of
maximum attainable without
September
October
November
economic/technical
disruption
Additional IEA crude oil production
0.2 0.4
0.2 0.4
0.2 - 0.3
0.4
Fuel switching
0.3 0.4
0.3 - 0.4
0.3 0.4
0.4
31473000 IS:00 62-80-0661
Stockdraw
i) Industry²
0.3 - 0.8
0.3 0.7
0.2 0.6
2.2
28 I I
ii) Public
0.0 - 1.1
0.0 - 1.2
0.1 1.2
5.0
Demand Restraint
0.7 - 0.8
-.7 - 1.0
0.7 - 1.0
3.0
TOTAL
1.5 - 3.5
1.5 - 3.5
1.5 - 3.5
11.0
imes responses by Finland, France and Iceland proportionate to those estimated for the IEA countries.
ject to government control or guidance.