Weatherization Department
The Friday Report Friday October 4,1996
FromWright Energy's
Weatherization Network Since 1984
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PERSPECTIVE ON OIL
The Consequences of Failure
From The LA Times
Most Americans aware of the meeting in Washington
between Israeli Prime Minister Benjamin Netanyahu, Palestinian President
Yasser Arafat and Jordanian King Hussein probably believe that the outcome
will not affect them in any way.
They could be wrong. The economic health
of the United States as well as that of most other industrialized nations
could depend on how the Israeli-Palestinian issue is resolved, because the
world's major oil-exporting nations may respond to a failure by cutting
output. In the current circumstances, such a cut would cause a dramatic
increase in prices, one that would make last spring's price rise look trivial.
Further, the summit occurred at a propitious
time for oil exporting nations--only a few weeks before elections in the
U.S. and Japan. Thus the Middle Eastern oil exporting countries have an
unparalleled opportunity to command attention, respect and even action from
the major industrialized nations. This time, the assumption that Israel
can ignore the demands of other nations may be incorrect.
Oil
exporting countries in the Middle East have gained such power over the world's
economies for four reasons: inventories of petroleum are very low; the only
unused capacity is located in the Middle East; world consumption of petroleum
has been much stronger than expected, and
finally, the world's oil industry has been counting on substantial increased
output from new projects in Europe, South America and the United States,
an increase that has now been delayed.
These four factors have created a situation
in which the demands of consumers are being met on a "just in time"
basis. Crude oil arrives from foreign suppliers, goes straight to refineries
and then is delivered quickly to consumers. Supplies have been so tight
that prices have been pushed up dramatically. The price of heating oil has
increased by almost 20% in Europe in just the past month as a consequence
of low inventories.
Part of the explanation for tight markets
can be found in industry expectations. For the past several months, refiners
throughout the world have been operating under expectations that the world's
supply of crude oil would increase dramatically in the fourth quarter. These
increases were projected to come from a resumption of oil sales by Iraq,
a sharp rise in output from the North Sea and higher production in the Gulf
of Mexico. The prospect of increased output caused many companies to minimize
current inventories.
But these expectations
have been dashed. Expected production from Iraq has been delayed by the
West's response to Saddam Hussein's actions against the Kurds. Projections
of increased production from the North Sea have been cut because of problems
encountered in the construction of new offshore production facilities. Output
from Mexico has been cut after a major facility exploded.
At the same time the world's appetite for
oil has increased at an unexpectedly rapid rate. A year ago, the International
Energy Agency in Paris projected that the world would consume 71.2 million
barrels a day in 1996. Many experts believe the true number will be closer
to 72.5 million barrels a day. The principal source of growth has come from
developing nations, where higher incomes have spurred a rapid rise in use.
The rapid increase in use combined with
delays on new projects and
the postponement of Iraq's sale of oil has left inventories very tight.
In current circumstances, announcement of a cut in production of 2 million
barrels a day (3% of world consumption) could easily add $10 to $20 per
barrel to the price of crude and 25 cents to 50 cents to the price of gasoline
in a few days.
This scenario has ominous implications for
the reelection prospects of both President Clinton and Prime Minister Ryutaro
Hashimoto in Japan. A rapid increase in gasoline prices, prospects of shortages
of heating oil during the winter and a plunging stock market could quickly
erode the confident aura that surrounds Clinton's campaign. The rising price
of oil and a falling market would also undermine Hashimoto.
Circumstances have created an opportunity for the Middle East oil exporting
nations--the silent partners at this Washington summit--to affect the direction
of world history. It is an opportunity potentially even greater than the
situation confronting them in 1973, when they imposed an embargo that ultimately
changed the course of events for the next quarter of the century.
It is an opportunity they are unlikely to
seize if the negotiations reach a satisfactory conclusion. Oil exporting
countries today have a much greater stake in the stability of the world
economy, as well as a continuing need for the involvement of the United
States in the Middle East. However, these countries do not have unlimited
reserves of patience. Their leaders face restless populations and they may
not be able to stand their ground. If these leaders respond, then everyone
in the United States will understand why the negotiations in Washington
were so critical.
Any fool can make a rule, and any fool will mind it.
Henry David Thoreau
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