U.S., Allies Should Plan To Avoid Oil Price Run Up Fed By Speculation

BY KENNEDY MAZE
Energy Daily, August 6, 1990

The Center for Security Policy, a conservative Washington-based think-tank, called on the
U.S. and its allies last week to “agree to a firm policy on the immediate release of Western oil
stocks in the event of any disruption of oil supplies in the aftermath of Iraq’s invasion of Kuwait
last week.

According to Roger Robinson, a former chief economist at the National Security Council,
such a policy in the winter of 1983-84 by the Reagan administration deterred oil price increases
and shortages during the “tanker war” in the Persian Gulf that accompanied the Iran-Iraq war.
“Speculators who had hoped to capitalize on international uncertainties and anxieties concerning
the implications of expanded attacks against tankers and oil facilities had their plans dashed when
this pro-active and coordinated alliance policy on early oil stock releases became known publicly,”
Robinson said. He played an important role in developing this policy.

What is to be feared, said the group, is a repeat of the fallout from the 1979 Iranian
revolution, where speculators turned a modest million barrel per day short-fall into galloping oil
panic. In five months, oil prices rose from roughly $12 per barrel to $36 per barrel.

Today, the world has a solid inventory of oil on hand. “There is an over-supply of oil in
the world markets at the present time,” Deputy Energy Secretary Henson Moore told reporters
last week, “and we do have the ability, if we do not import Iraqi or Kuwaiti oil, of going into the
market place and buying oil for other sources to replace that.”

According to Moore, domestic commercial stocks of oil in the U.S. are at an all time high,
21 days supply. Also, the DOE’s strategic petroleum reserve contains 590 million barrels of
crude, piled up just for the possibility that Arab conflict might disrupt oil markets.

In the worst case, says the Center for Security Policy, as much as four million barrels per
day could come off the market as a result of Iraq’s takeover. “Even this highly unlikely short-fall
could be covered by the five million barrels per day represented by the combined release of U.S.,
Japanese and German stocks — not to mention the contribution Britain, France, Italy and other
European nations might make to this effort to stabilize oil prices.”

In the aftermath of the invasion, domestic U.S. producers were using the event to help
make their case for additional support for domestic production, including additional tax breaks.
“The new Mideast crisis involving Iraq and Kuwait is yet another warning of that the United
States must quickly initiate an ongoing and effective national energy policy that emphasizes
domestic fuel development,” said James Russell, president of the Texas Independent Producers
and Royalty Owners Association.

“The Iraq-Kuwait dispute should be the latest signal to U.S. government policymakers
that unless immediate action is taken to restore U.S. energy security and a healthy domestic oil
and natural gas industry,” said Paul Hilliard, chairman of the Independent Petroleum Association
of America, “the alternative is to see a return to the days of the 1973-74 Arab oil embargo and the
long gasoline lines and the massive economic dislocation that occurred then.”

Consumer groups were also warning of a sharp run-up in prices. “Although gasoline
prices are currently higher than they should be given the previous decline in oil prices,” said Ed
Rothschild of Citizen Action, “there is little doubt that the invasion the Iraqi invasion of Kuwait
will push prices even higher despite a glut of oil on the market. Panic is once again rampant. Oil
companies will once again cash in on the sudden increases in prices by sitting on oil inventories
and reaping inventory profits. Consumers will see gasoline price increases almost immediately,
with prices climbing 15 cents to 20 cents a gallon over the next few weeks.”