Will war bring oil crisis? - Crude prices are already on the rise, but this time, America is better prepared to handle a shortage.

www.kansas.com Posted on Sun, Feb. 16, 2003 BY SUDEEP REDDY Dallas Morning News

In 1973, oil was used as a political weapon in the Arab embargo. In 1979, the Iranian revolution disrupted production.

Today, as a possible war with Iraq approaches, fears of reduced oil supplies from the Middle East -- combined with a shortfall from Venezuela -- have sent crude prices soaring again.

Is this the precursor to the next energy crisis? Or just a short-term blip that will pass quickly?

Experts agree that today's oil market is one of the most fragile in decades. But they say oil-consuming nations have learned lessons that could help prevent another full-blown crisis.

"The world of the emergency physical shortage is not likely to emerge the way it did in the '70s," said Amy Jaffe, senior energy adviser at Rice University's Baker Institute for Public Policy. "We might see some giant psychological price we haven't seen in years, for some short period of time. But I don't think it would last that long."

Oil prices have moved higher as the war drums have gotten louder. Crude oil for March delivery closed Friday at $36.80 a barrel on the New York Mercantile Exchange, up about 80 percent from a year ago.

That worries economists. Nine of the country's 10 recessions since World War II were preceded by sharply higher oil prices.

"It's very likely that the current oil prices are contributing to the weakness of the U.S. recovery," said Stephen Brown, director of energy economics at the Federal Reserve Bank of Dallas.

Oil prices between $30 and $40 a barrel are "a cause for concern," he said. "Once you get above that, it's more than cause for concern. It's kind of a one-alarm fire."

In Venezuela, which was the United States' fourth-largest supplier, a 10-week strike at the state oil company has cut production by two-thirds. As a result, commercial U.S. supplies are at a 27-year low -- a point at which refineries could face shortages.

The United States is more dependent on oil imports today than it was in the 1970s. And the world's excess production capacity is 2 million barrels a day, the U.S. Energy Information Administration said earlier this month.

That's the equivalent of Iraq's production, which would fall sharply if war breaks out. In other words, the industry would be hard-pressed to replace a shortfall.

"Oil markets now are as tight as a fully stretched rubber band," the energy administration said. "Whether the rubber band breaks or not will largely depend on the pace of demand in coming weeks."

Gas prices are on the rise nationwide. In Kansas last week, the price of a gallon of regular unleaded gas topped $1.60 -- the highest level ever for the state in February.

Even so, prices are relatively low. In 1981, gasoline was $2.70 a gallon in today's dollars, according to the American Petroleum Institute. (The average price at the pump then was $1.35.) In today's dollars, crude oil reached its historic high of about $80 a barrel in 1980. That was after the U.S. Embassy was seized in the Iranian revolution, resulting in lowered production and the refusal of the United States to import Iranian oil.

The 1973-74 Arab oil embargo -- in which Arab countries retaliated against the United States for its support of Israel -- remains among the clearest reminders of American dependence on foreign oil. Drivers had to wait several hours in lines.

But since the 1970s, oil-exporting nations have worked harder to forge business ties with oil-consuming countries. And the American economy and government changed key practices.

"We were less prepared to deal with higher oil prices because we had built an industry, an economy and lifestyle based on cheap energy," said Allen Mesch of PetroStrategies Inc. "We became sloppy in its use. That meant that when energy prices went up, we were much more exposed to those prices" and their effect on the economy.

Unlike the crippling crises of the 1970s, today the United States and other oil-consuming countries have strategic stockpiles and joint conservation policies that could temper higher oil prices.

"In the '70s we had no one," said Jaffe of Rice University. "No country had strategic stocks, and there was no ability to have a policy to respond to an emergency.... We actually did learn something from '73 and '79, and we have never actually had to test the system from what we learned."

Plans for the U.S. Strategic Petroleum Reserve were launched after the 1973-74 embargo. Construction began in 1977. The salt caverns that make up the reserve -- in four locations in Texas and Louisiana -- have about 600 million barrels of oil.

The emergency system can pump about one-fifth of daily U.S. consumption for 90 days before slowing down.

The first emergency release was in January 1991, as the elder President Bush launched Operation Desert Storm.

If another war breaks out in Iraq, analysts expect the new Bush administration to release oil from the reserve to temper the market reaction.

Military events in the first few days of a war will be crucial for the oil markets. Iraqi forces have reportedly started rigging oil wells with explosives, as part of a "scorched earth" plan to destroy resources.

And any conflict in the Middle East raises worries about collateral damage -- from terrorism against tankers and oil-export terminals, blocked shipping lanes, or even a full-blown attack against other oil-producing countries.

"What drives a lot of fears from people who are responsible for buying this oil is, can they get it where they need to?" said Mark Baxter, director of Southern Methodist University's Maguire Energy Institute. "Is this thing going to escalate into the adjoining Persian Gulf area?

"The uncertainty stalks us from many different angles," he said.