OPINION> China Watch
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OPINION> China Watch
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The world actually has all the oil we need
By Eugene Gholz and Daryl G. Press
Updated: 2008-08-27 07:24 While oil prices have declined somewhat of late, the volatility of the market and the political and religious unrest in major oil-producing countries has Americans worrying more than ever about energy security. But they have little to fear - contrary to common understanding, there are robust stockpiles of oil around the globe that could see us through any foreseeable calamities on the world market. True, trouble for the world's energy supplies could come from many directions. Hurricanes and other natural disasters could suddenly disrupt oil production or transportation. Even worse, this uncertainty comes in the context of worrisome reports that oil producers have little spare capacity, meaning that they could not quickly ramp up production to compensate for a disruption. But such fears rest on a misunderstanding. The world actually has enormous spare oil capacity. It has simply moved. In the past, major oil producers like Saudi Arabia controlled it. But for years the world's major consumers have bought extra oil to fill their emergency petroleum reserves.
Moreover, whereas the world's reserve supply once sat in relatively inaccessible pools, much of it now sits in easily accessible salt caverns and storage tanks. And consumers control the spigots. The United States alone has just more than 700 million barrels of crude oil in its Strategic Petroleum Reserve. Government stockpiles in Europe add nearly another 200 million barrels of crude and more than 200 million barrels of refined products. In Asia, American allies hold another 400 million barrels. And China is creating a reserve that should reach more than 100 million barrels by 2010. Those figures only count the government-controlled stocks. Private inventories fluctuate with market conditions, but American commercial inventories alone include well over a billion barrels. Adding up commercial and government stockpiles, the major consuming countries around the world control more than 4 billion barrels. Some policy makers and analysts worry that these emergency stocks are too small. For example, they sometimes compare the American strategic reserve to total American consumption, so the reserves appear dangerously inadequate. The United States consumes about 20 million barrels of oil every day, so the Strategic Petroleum Reserve could only supply the country for 35 days. (Furthermore, the United States could not draw oil out of the reserve at anything approaching a rate of 20 million barrels per day.) This is why President George W. Bush in his 2007 State of the Union address called for doubling the strategic reserve. But this vulnerability is a mirage. The size of plausible disruptions, not total consumption, determines the adequacy of global reserves. The worst oil disruptions in history deprived global markets of 5 million to 6 million barrels per day. Specifically, the collapse of the Iranian oil industry during the revolution in 1978 cut production by nearly 5 million barrels a day, and the sanctions on Iraq after its conquest of Kuwait in 1990 eliminated 5.3 million barrels of supply. If a future disruption were as bad as history's worst, American and allied governments' crude oil stocks alone could replace every lost barrel for eight months. Significantly impeding oil traffic would require a sustained military campaign. Dozens of tankers carry more than 15 million barrels of crude through the strait every day. The water is so deep that the navigable channel for supertankers is 36 km wide at its narrowest point. There is simply too much traffic across too much space for the waterway to be easily blocked. Countries have attacked oil infrastructure before, and the results were underwhelming. During the Iran-Iraq war, Baghdad and Teheran struck each other's oil terminals and tankers repeatedly, but they proved to be very resilient targets. Rugged structures and quick maintenance meant that Iran's Kharg Island terminal kept pumping despite repeated bombings. Tankers, which dwarf aircraft carriers, have thick hulls designed to prevent oil spills and, when attacked, proved to have few sensitive parts where a "lucky" hit could cause serious damage. They managed to keep the oil flowing through Persian Gulf waters throughout the Iran-Iraq war. Make no mistake, any major disruption - from a war, a terrorist attack or a natural disaster - would make prices jump until markets realized that the pipes feeding crude into refineries were not going to run dry. But recognizing the great capacity of global reserves to weather disruptions will go a long way to minimizing panic. Emergency reserves have their limits. They cannot free the industrialized world from the underlying economic fundamentals that drive energy prices. As the global economy grows, demand for energy will rise and oil prices may remain high. Government-controlled stockpiles should not be used to try to smooth out short-term blips in global supplies, the normal variations that companies account for with their inventories and financial hedging. Paradoxically, our exaggerated fears over energy security have some benefits - for example, they may reduce the United States' inclination to attack Iran. But they also have big costs. Politicians could be induced to try costly solutions for problems that don't exist, like President Bush's commitment to double the size of the Strategic Petroleum Reserve. Western leaders may also pay too much heed to an oil producer's saber-rattling. And, finally, exaggerated fears may encourage oil-market traders to panic at the first sign of even a small disturbance. When it comes to energy security, let's not let fear get the best of common sense. Eugene Gholz is an associate professor at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin, and Daryl G. Press is an associate professor of government at Dartmouth College The New York Times Syndicate (China Daily 08/27/2008 page9) |
