Interesting perspective on the Saudis and oil, from Tuesday's WSJ:
November 13, 2001
Commentary
We Can Live Without Saudi Oil
By Susan Lee
She said she was our best friend while all the time she was embracing our enemies. Now she seems to want to make up. And we are probably going to continue our relationship with her -- she's got what we crave. But the truth is, she's not that attractive. And actually, we could live without her.
She, of course, is Saudi Arabia.
There is no question the U.S. needs oil. World oil production stands at about 77 million barrels a day, of which the U.S. takes about a quarter. We produce about 40% of our needs and import the rest from about a dozen other countries -- including 1.2 million barrels a day from Saudi Arabia. Most of that oil, imported or domestic, is consumed by transportation -- cars, trucks and airplanes.
Of course, none of the oil we import comes marked "Saudi Arabian." The oil market is a world market. Jerry Taylor, an energy economist at the Cato Institute, describes it as a big bathtub: Suppliers fill it at the top, users drain it at the bottom. Thus, if the Saudis decided not to sell oil to the U.S., but kept on producing, there would be no effect on the amount of oil in the bathtub.
But what would happen if, let's say, Islamic fundamentalists seized control of Saudi Arabia's oil fields and capped the wells? Would it be the end of the world?
The initial impact of the loss of 7.5 million barrels a day (10% of world supply) would be on world oil prices. Here, the effect must be divided into very short term, short term and long term. In the very short term, the expected price spike would include an element of panic -- hoarding and speculative buying -- so prices might shoot as high as $90 a barrel for several months. In the short term, energy economists estimate a range from $45 to $60 a barrel, although most cite $55. But over the long run, say three years, prices would settle down.
A second impact is the effect higher prices would have on GDP growth. Studies done in 1990 found that a sharp run-up in prices would take 3% to 4% off oil-consuming economies in the first year. But damage to the U.S. would probably be less today because oil consumption has fallen relative to the economy. Michael Lynch, an economist with DRI-WEFA, says that oil use relative to GDP has dropped almost 45% since 1979 and the real price of oil has dropped by one-third. This means money spent on oil is about 40% of what it was relative to GDP 20 years ago.
So a reasonable estimate for the U.S. today would be that $55-a-barrel oil would create a 3% gap in GDP over the first year, which would narrow to 2.5% over the second year and then fall to 1.5% over the third year -- with a complete adjustment coming by the end of that year. Nasty, yes. But hardly the end of the world.
The crucial element in this scenario is that high prices have their own dynamic. They not only chill demand but encourage supply. On the demand side, higher gasoline and diesel fuel prices would translate into less driving and air travel, and the purchase of more fuel-efficient cars. This demand response could save two to three million barrels a day in five months.
More rewarding, on the supply side, high prices would call out more oil from various sources. After all, $55-a-barrel oil would make oil that was formerly very expensive to drill suddenly very attractive. Domestically, hundreds of thousand of wells producing small amounts could add, in the very short term, another 300,000 to supply and, in the longer term, up to one million barrels a day. There would also be increased production from deep-water wells. (Drilling in the Arctic National Wildlife Reserve could produce one million barrels a day, but that's a very long term result.)
As for foreign sources, Kuwait, Iran, the UAE and Iraq have spare capacity that could fill the world's oil bathtub at a rate of 2.5 million barrels a day. Another one million barrels a day might come from Mexico, Venezuela and the North Sea. But the biggest additional source is Russian oil. Russia now exports almost three million barrels a day and has promised to double that. There's also spare capacity in Central Asia and Nigeria. Too, high prices would swiftly spur an increase in oil from Canadian oil sands.
Then, there are the strategic oil stocks held by governments. Japan, the U.S. and Germany hold 1.2 billion barrels that, if released at a rate of five million barrels a day, would last six to eight months. Oil reserves alone could make up over 50% of a Saudi shortfall.
If one adds up only the supply response in the short term, and then, to be super-conservative, halves that 13 million barrels a day to 6.5 million, the entire Saudi loss almost disappears. Just as reassuring, no oil expert thinks that Saudi production would go to zero -- Islamic zealots or not. Not only is oil the mainstay of its economy, the country is staring at some huge economic problems; whoever sits in Riyadh really needs oil revenue.
In fact, the biggest danger to the U.S. from a Saudi reduction comes from government overreaction. That is exactly what happened in 1973-74, when the Organization of Petroleum Exporting Countries managed to quadruple world oil prices. But the adjustment process was thwarted by government policy (remember price controls?) that allowed OPEC to keep prices high.
Thus, the worst-case event -- complete withdrawal of Saudi oil from world markets -- would generate a painfully tight oil market for three to six months and a discouraging but not fatal hit to the U.S. economy. And the U.S. would find itself plenty of new best friends. |
