World: The Threat to the Oil Flow

No shortages yet, but a closure of the strait could be catastrophic

Within hours of full-scale warfare between Iraq and Iran, the two countries were out of the oil-exporting business, and the world abruptly lost 7% of its total petroleum supply. If it had to happen, the loss could hardly have come at a better time. For good reason, throughout the West there was a concerted effort to reassure the public. Some oil experts and politicians insisted that there was no cause for panic, that the future was not so desperate as some headlines leaped to suggest, and that the immediate impact of no oil from Iraq and Iran would be negligible. Speaking at a White House press conference last Wednesday, Jimmy Carter stressed that there was no energy emergency. Said he: "The consuming nations can compensate for the shortfall."

The reason for the confidence is a fat cushion: oil stocks now are more plentiful than they have ever been. On average, they are equal to about 100 days' supply in the non-Communist world. Aside from the high inventories, there is also considerably less demand because of the global recession. Before the Persian Gulf war, according to British Energy Secretary David Howell, free-world production was exceeding consumption by about 2.5 million bbl. a day. The excess had resulted in a general agreement by the Organization of Petroleum Exporting Countries at their Vienna meeting two weeks ago to slash output by 10%. "My understanding is that the [OPEC] agreement is now on ice," Howell said in Washington last week, meaning that the other OPEC countries would maintain their pre-Vienna output to cover the lack of oil from Iraq and Iran. He pointed out that the previous surplus and the present shortfall should just about cancel each other.

Only a few buyers will actually miss Iran's supplies. Under the Shah, the country was the second largest OPEC producer after Saudi Arabia; but lack of maintenance, spare parts and skilled workers since the revolution cut production from a 1974 peak of 6 million bbl. a day to 1.5 million. Of this, only 700,000 bbl. were being exported. Still, customers like Rumania, India and Spain, which have continued to receive shipments on the order of 150,000 bbl. a day, will now have to turn to different sources for their crude.

The loss of Iraq's supplies is more serious. Exports averaged more than 3.2 million bbl. a day, representing 11% of OPEC's total, the biggest production after Saudi Arabia's. The major victims of the cutoff now will be Brazil, which has depended on Iraq for 45% of its oil needs, Japan (30%) and France (23%). With the noncombatant OPEC nations probably making up the shortfall, there may be some scrambling for supplies, but it still should not be too difficult for consumers to buy all they need.