Y2K & Oil Prices:
Long time no see, Zeev! How are you?
Any thoughts on how Y2K might affect oil?
"The following was forwarded to us this morning, by David Seay from California:
Guys: I am working on the Y2K problem in Saudi Arabia. The embedded chips have not been looked at. I can ASSURE you that oil supplies from this region will dry up. And a few of the petrochemical plants will surely do likewise, if not blow-up.
Like many other professionals, I plan to clear off, which will simply make the problem worse during a Northern Hemisphere winter. The clue will be big stockpiling next year of the glutinous black stuff.
- Bob of Arabia
Date: Sat Nov 28 1998 23:18
sharefin (it's a repeat - what's the chances???) ID#284255:
wbn.com:8080/
WBN believes the Y2K downturn will begin in 4Q99 as oil ratchets up to $30 due to a shutdown of non-Y2K-compliant oil producing wells in Saudi Arabia and Kuwait.
------
$30 oil?
Where would that send gold?
Date: Sat Nov 28 1998 23:41
sharefin (Consumer FAQ: Oil and Gasoline ) ID#284255:
-
zdnet.com
By Mitch Ratcliffe - ZDY2K
Q: Will oil and gasoline continue to flow at reasonable prices?
A: It will flow, but the price may well rise. The problem of Y2K in the oil and gas production supply chain is a tremendously complex one. There are embedded systems at every step along the way, from oil rigs and the drills at the bottom of the North Sea and the middle of nowhere stretches of oil pipelines in Alaska, Russia and the Middle East, to the systems that control refineries and distribution systems. An oil rig might contain 10,000 microprocessors, according to a Shell executive speaking London recently. Additionally, the computer applications that control the infrastructure may suffer from Y2K problems.
In April, 1998, World Oil magazine reported that the industry "can expect to remediate less than 30 percent of the overall potential failure points in the production environment." This does not mean the 70 percent of the oil-related systems around the world will fail, only that the industry will be able to address 30 percent of the total possible problems.
That means that some oil drilling, refining and distribution systems are going to fail. There can be no doubt of it, in fact, because the oil industry is one of the most computerized in the world. Too, many of the systems used pre-date 1990, when few embedded systems manufacturers contemplated Y2K issues.
According to their Y2K Web sites, Texaco and Mobil both expect to encounter some problems. Mobil has focused on bringing its supply chain into compliance, emphasizing its business systems, like purchasing, sales management, intercompany communications and EDI applications. Without these working in good order, the company would have no way to pay for the oil it buys and sells. Texaco has dedicated $75 million to its remediation project. So far, it has found 800 applications that need Y2k work. In April, 1998, the company had 60 percent of its control systems inventoried and projected that between two percent and four percent would ultimately need to be repaired. It expects to be finished with upgrades and to begin testing by the end of 1998.
According to recent figures, the U.S. consumes about 47 million barrels of oil a day. Worldwide, oil use continues to rise with expanding industrialization and is expected to reach 75.6 million barrels a day. Oil production worldwide is about 51 million barrels a day. So, the globe is always operating off its reserves rather than what is being produced, which puts considerable pressure on the distribution system to keep oil flowing and prices steady.
As we all know, oil is a volatile commodity. Anyone who lived through the OPEC oil crisis of the mid 1970s has worried that prices could exceed $4 a gallon, someday. In many European countries, gas does cost more than $2.50 a gallon. An event like the Persian Gulf War may drive prices up by as much as 50 percent. However, in the case of the Persian Gulf War, it was largely profits from speculation that raised prices at the pump; there was never actually a major shortage. The U.S. government's Strategic Petroleum Reserve ( SPR ) released less than one-quarter of one day's worth of oil to the market during the war.
Y2K may produce the same kind of price bump, simply due to of market jitters about what will happen. Actual failures will certainly raise speculation and, hence, prices at the pump. Additionally, whatever the cost of Y2K remediation in the field, it will immediately be passed on to consumers -- it has always been the case that costs were quickly moved from the driller, to the refiner and via the distributor to the consumer.
What would happen if 30 percent of the world's oil supply were interrupted due to Year 2000 computer and embedded chip problems?
First, the President would have the option to release fuel from the SPR, a 563 million barrel oil storage system along the Gulf of Mexico. If the domestic distribution system is functioning, the feds will be able to move oil to refineries very rapidly to make up for the deficit. But, that will not prevent prices from rising, because oil from the SPR is sold at competitive prices. Should the price on the world market be $40 a barrel, instead of today's $19 or so, that's what the feds will charge.
A 30 percent reduction in production would translate into a U.S. deficit of 14.1 million barrels of oil each day. The SPR contains enough oil to keep the nation rolling along at its current consumption levels for roughly two months. Because the SPR can only release 4 million barrels of oil a day ( see below ) , the supply would last for 240 days at current levels.
zdy2k.com queried Rick Furiga, deputy assistant secretary for the Strategic Petroleum Reserve at the Department of Energy to find out what the agency planned in response to Y2k. Here is an excerpt of the reply:
Whether the SPR would be used in the event of oil production being interrupted by a year 2000 computer problem will be a matter for the President to decide at that time. It has always been a principle of SPR planning that the Federal Government will maintain complete flexibility to respond to supply interruptions, and will not define a trigger for drawing down the inventory of the SPR.
We do not believe that the production of crude oil throughout the world will be substantially affected for a prolonged period by the year 2000 problem. However, for the sake of discussion, if production were to be negatively and substantially impacted, the United States in coordination with the other 22 countries that are members of the International Energy Agency would consider the volume of production loss, the inventory situation, the reaction of unaffected producers with spare capacity, and reports of shortages. If the situation appeared serious the Department of Energy could recommend to the President that oil be sold from the SPR. The decision to sell or not sell would be at the discretion of the President. If he decided to sell oil from the SPR it would be contingent upon issuing a finding of an energy supply emergency.
In the event that such a drawdown and sale were ordered by the President, the Department of Energy would issue an immediate solicitation for bids, and would be prepared to actually deliver oil within 15 days. In January 2000 the maximum rate of delivery from the SPR will be about 4 million barrels per day, and that rate would decline after the first 90 days. If all of the oil were to be sold, the SPR would be exhausted after 240 days. However, it is highly unlikely that a full scale drawdown would be required, because whatever the shortfall, some of the shortage would be offset by expanded production from excess capacity and other International Energy Agency country sales of emergency oil stocks. Of course, the slower the rate of sales from the SPR, the longer the 563 million barrel inventory would last.
Based on our research, we're confident that oil and gasoline will be available at or near current levels. Speculative pricing of oil and gas, however, almost certainly guarantees that prices will rise in response to the approach of the millennium or to actual problems caused by Y2K errors. " |
