Making sense of oil supply & demand in a time of war
Peter Behr, Washington Post Published March 23, 2003 OIL23
At the start of the first Persian Gulf oil crisis 30 years ago, America's hulking, chrome-laden cars covered about 15 miles on a gallon of gasoline. But few motorists gave that a second thought -- not with gasoline priced at 38 cents a gallon.
At the same time, U.S. factories soaked up 43 percent of the nation's energy supplies and members of Congress debated how to address the power of the "seven sisters," the international oil companies that dominated worldwide production.
A generation later, as the fourth Persian Gulf confrontation gets underway, the nation's oil needs and uses have changed, mirroring broad transitions in society and commerce.
Cars have slimmed down in a campaign to boost gasoline efficiency that succeeded in the 1980s but stalled in the 1990s. Persian Gulf kingdoms have supplanted the multinational oil companies as dominant producers. Today, oil companies cautiously manage exploration and inventories, a strategy that played a part in a surge in prices that has continued as war begins in Iraq. From its peak of $40 a barrel last month, crude oil fell below $30 a barrel Wednesday. The benchmark West Texas intermediate crude closed Thursday at $28.61, falling $1.27 on expectations of a swift U.S. victory.
On Monday, gasoline prices nationwide averaged more than $1.70 a gallon, a record for this time of year.
The transformation in oil dates to the 1970s, when prices quadrupled, forcing U.S. industries to change their manufacturing processes to reduce energy costs.
Homes and appliances became more efficient, too, and the amount of energy needed to produce a dollar of gross domestic product dropped by 33 percent from 1973 to 1991.
Soaring pump prices and long gasoline lines in the late 1970s triggered a revolution in the auto industry, as consumers demanded cars that went farther on a tank of gasoline. Congress required that new vehicles get at least 27.5 miles per gallon, beginning in 1985. New cars' performance, led by imports, jumped from 20 miles per gallon at the end of the 1970s to 28 in the mid-1980s. Once that target had been reached, though, it was not raised, and the mileage performance of new cars stagnated.
An expanding and more affluent population, driving bigger cars, boosted gasoline demand 2 percent a year in the past decade.
Shrinking inventories
But the restructuring of the oil industry has left the United States increasingly dependent on gasoline imports to satisfy motorists' needs, said Douglas MacIntyre, a senior oil analyst at the Energy Information Administration. U.S. refineries that manufacture gasoline are operating at or near capacity, he said, "and we aren't building new ones."
Until the 1970s, seven oil companies held the coveted prime oil-production concessions in the Persian Gulf: Exxon, Mobil, Chevron, Texaco, Gulf, Royal Dutch/Shell and British Petroleum. Now the seven sisters are four: Exxon Mobil, ChevronTexaco, Royal Dutch/Shell and BP.
In the view of Daniel Yergin, the author of "The Prize," the largest multinational companies have become bureaucratic corporations, balancing risks to maximize profits and compelled -- despite their size -- to compete for shareholder support and financiers' capital.
One consequence is the oil companies' unwillingness to get stuck with large inventories of high-priced crude oil or gasoline when pump prices start falling, MacIntyre said.
Paul Ting, a managing director of Salomon Smith Barney Inc., estimates that as a result of the wave of mergers in the industry in the past half-dozen years, the seven biggest U.S. oil producers and refiners have cut their crude oil inventories by 115 million barrels.
The U.S. economy stumbled after the Sept. 11, 2001, terrorist attacks, and early last year OPEC cut production and the Bush administration began buying oil for the nation's Strategic Petroleum Reserve. Oil prices began to rise, and U.S. producers let inventories drop.
The inventory numbers are a crucial benchmark of supply and demand for a legion of investors, speculators, and industrial and commercial buyers, who trade oil and oil products on commodity exchanges.
Prices rise
As stocks of crude oil and gasoline in the United States began to shrink last year, traders bid up the prices of oil and gasoline.
Growing concerns about a U.S. confrontation with Iraq began to inflate oil prices in September. A hurricane in the Gulf of Mexico hurt oil production in October, further reducing inventories, and a December strike at oil fields in Venezuela, a critical U.S. supplier, pushed oil prices over $40 a barrel this winter.
Changes in gasoline prices on commodity markets begin to show up at the pumps in as little as a week. The volatility of the system means that energy prices could rise, or fall, rapidly once the uncertainty of the Iraq conflict is resolved, said Adam Sieminski, a Deutsche Bank analyst.
Three main fields are the key to Iraq's oil production, which contributed 5 percent of U.S. oil imports last year, Sieminski said. "If U.S. and British forces can secure them before anyone blows them up, that would be very good news."
That is the bet among a majority of traders on commodity markets, analysts say -- one reason why oil prices have dropped recently.
Oil prices could sink to $25 barrel or lower if the U.S. campaign succeeds, said analyst Peter Beutel, president of Cameron Hanover Inc., in New Canaan, Conn.
Mark Zandi, the chief economist at Economy.com, said, "The markets are priced for a perfect war." If all goes well, the economy will turn upward. "Not roaring back, but back," he added. "If we get anything less than that, we have a problem. If prices don't fall quickly, I'd say we're in a recession in a month or two."