Events could force U.S. to use more Saudi oil
www.miami.com Posted on Sun, Jan. 12, 2003 BY CHRISTINA HOAG choag@herald.com
A political deadlock has all but strangled Venezuela's oil flow, the fourth-largest in the world. The looming U.S. invasion of Iraq would dam another river of petroleum.
That double whammy means the global oil market could face a shortfall of four million barrels a day of the vital stuff that keeps economic engines humming. Who's George W. Bush gonna call?
Try Saudi Arabia.
Like it or not, the world's biggest oil consumer is still hostage to the vast desert kingdom despite diminishing its reliance on Saudi oil in the decade since the Gulf War.
The reason is not so much the staggering amount of petroleum that the Saudis produce every day -- more than eight million barrels. It's the fact that they can churn out even more while other major U.S. suppliers, such as Canada, Mexico and the United Kingdom, are pumping all they can.
''There is virtually no excess capacity anywhere else in the world,'' said Edward S. Walker, a former U.S. ambassador to Israel, Egypt and the United Arab Emirates who now presides the Middle East Institute in Washington.
STRAINED TIES
The House of Saud has traditionally been one of Washington's strongest allies in the volatile Persian Gulf, with oil the linchpin of the relationship. But ties between the two nations have been seriously strained since Sept. 11, 2001.
Fifteen of the 19 Arab terrorists who rammed commercial airliners in the World Trade Center and the Pentagon and crashed another into a rural field turned out to be Saudis.
Since then, U.S. investigators have discovered that Saudi money has been financing radical Muslim groups around the world.
Americans have also been taking more note of the restricted civil liberties in the closed, archly conservative society, which run counter to democratic values actively promoted by Washington elsewhere in the world.
This chill in the previously warm U.S.-Saudi relationship has sparked calls for the United States to lessen reliance on the kingdom's crude, which was the second-biggest foreign supply to the United States in 2002.
To some extent, Washington had already done that since the Gulf War, when similar calls to seek supplies away from the tinderbox Middle East were heeded.
In 1991, Saudi Arabia supplied almost a quarter, 23.6 percent, of U.S. imports. Last year, it provided about 13.5 percent, according to the American Petroleum Institute.
''There has been some diversification, with more imports coming from the Western Hemisphere,'' said Ron Planting, institute economist. ``Middle Eastern oil has been going to Asia, where demand has been growing fastest.''
TOP SUPPLIER
Canada's Alberta province is now the top foreign supplier to the United States, advancing from 13.6 percent of imports in 1991 to about 17 percent last year.
And until a national strike cut off its oil exports in December, Venezuela was the No. 3 supplier with about 13.8 percent of the market, about the same as in 1991. Mexico, the fourth-largest supplier, has moved up from 10.6 percent to about 13 percent last year, also.
Trouble is, when production drops at one of these main suppliers -- as is the case with Venezuela, where oil exports remain all but paralyzed -- all eyes turn to Saudi Arabia to make up the shortfall and keep prices from going through the roof.
'They are the `swing' producers,'' said John Lichtblau, chairman of the Petroleum Industry Research Foundation in New York. ``They have about two million barrels a day of spare capacity.''
The oil market is especially jittery because another war with Baghdad appears likely -- and could happen within the next 60 days. An invasion would shut down Iraqi oil fields, taking another two million barrels of oil a day off the trading floor.
Although the United States has sharply curtailed purchases of Iraqi oil over the past few months -- it was the seventh-biggest supplier to the United States until October when it dropped off the top 10 list -- a shutdown of the Iraqi industry would raise prices.
And even if Venezuela's strike ends before war breaks out in the Middle East, it could take several months before the industry ramps up production to where it was before the strike, around 2.5 million barrels a day.
Washington has been preparing for a tighter oil supply by gradually increasing the nation's Strategic Petroleum Reserve to about 600 million barrels. If both Venezuela and Iraq are out of the picture, the Department of Energy will likely start putting that oil on the market to keep prices down.
''We're not facing a crude shortage,'' Lichtblau said. ``We can release several million barrels a day for three, four, five months, which is enough time for Iraq and Venezuela to get back on line.''
INCREASED OUTPUT
OPEC is also doing its part. In a special meeting today, the oil producers' club is expected to authorize a Saudi-led move to increase production by one million to 1.5 million barrels a day, which will alleviate the current shortage resulting from the Venezuelan crisis.
''That has a significant effect on calming prices,'' said John Kilduff, analyst at Fimat USA. ``But it points up how difficult it is to replace Venezuelan crude.''
With growth in oil demand expected to continue, Washington has also been seeking new sources of crude oil as well as refined products.
The Caspian Basin, Western Africa, and South and Central America are all seen as potential providers, but none of those places will reach significant production levels until 2025, according to the U.S. Department of Energy.
Analysts say it will take years for those undeveloped regions to net the billions of dollars in private investment needed to build infrastructure, as well as sort out often turbulent political environments. In some places, tough geographical terrain requires developing new technology to drill and transport hard-to-get-at oil.
In the meantime, the Saudis, whose crude is easy to access, export and refine, will continue as the world's oil heavyweight. ''Saudi Arabia still sits in the catbird seat,'' said Walker of the Middle East Institute.