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Oil: "Clearly, There Is a New Threat"

Since the U.S. began its war on terrorism in the aftermath of the September 11 attacks, oil markets have been jittery about the possibility of a supply disruption -- with good reason. The U.S. imports 51.6% of its oil needs, and half of that from OPEC. With Saudi Arabia and other Mideast oil-producing nations facing potential destabilization because of U.S. bombing in Afghanistan, the chance of interrupted oil supplies is greater than it has been since Iraq's invasion of Kuwait.

When oil prices spiked shortly after September 11, the U.S. and the 25 other members of the International Energy Agency (IEA), the West's energy watchdog, discussed the possibility of releasing stockpiled oil to calm global markets. But that proved unnecessary as oil prices began to fall on concerns about weak global economy.

On Oct. 26, IEA Executive Director Robert Priddle spoke with BusinessWeek Senior Writer Rich Miller and Correspondent Laura Cohn about his view of the current energy-supply situation, the risk of disruption, and his preference for less reliance on OPEC. Edited excerpts from their conversation follow:

Q: After the events of September 11, members of your agency started planning for an interruption in oil markets. What can you tell us about that?

A: It's a basic function of the IEA to contribute to the security of our members against the threat of supply disruption. The events of September 11 in themselves didn't threaten oil supplies, but the market immediately factored in a new nervousness. That didn't last very long, and the price came down again within a week. Clearly, there is a new threat, and it's appropriate for an agency like ours to respond to that and make sure its members are fully geared up.

Q: Specifically, what were you planning to do?

A: It's difficult to be more specific, not the least because the circumstances are so imprecise. Nobody thinks the very careful [U.S. military] action that's being taken at the moment poses any specific threat to oil supply. What we were doing was making sure we had the mechanisms polished and ready for such a situation.

The question that's frequently debated is, "If the price gets to a level that is really economically uncomfortable, is there a justification for really intervening?" So far, the answer has been, "No, that's not our business." But there is a middle ground. We were in that middle ground in the few days after September 11, where the market was clearly expressing alarm, reflected in price. But it proved to be short-lived, and didn't reflect an actual physical threat [to supply].

Q: So you could see yourself intervening under certain circumstances?

A: If there were some sort of amassing of might be appropriate.

Q: Instead of relying on OPEC so much, what would you rather see the U.S. do?

A: I would rather see the market control the price. But I'm not unrealistic. When you have a set of 11 countries, for many of whom oil is an absolutely overwhelming source of revenue, I don't think they're going to give up their present mode of operation very easily. We'll take such defensive measures as seem necessary, but I won't assume we're in a confrontation.

The relationship between OPEC and IEA has changed very much over the years. In the past month, I've talked to the secretary general of OPEC about what's going on, and we try to help each other to understand. We're not fighting each other.

Q: So why is there concern in the market about a supply disruption?

A: There are lots of developing situations one could envision that do amount to actual threats to supply. It's not very helpful to specify those. For us, it's more helpful to say we'll be ready to react, whatever the source of the supply interruption.

Just to take one example: It's possible that [an OPEC member] could make the judgment it wishes to intervene in this situation by denying supply. I don't think that's a serious threat, frankly. I don't think the other members of OPEC would allow that to pass without seeking to make [up the shortfall].

Q: Has there been any discussion in the IEA about a tariff on oil imports to reduce our reliance on overseas supplies?

A: Over the years, there has been discussion about a floor price and a ceiling price and manipulation by tariffs or subsidies or all sorts of things. But at the moment, there is no active discussion between IEA members collectively.

Q: Is an economic recovery consistent with the price band OPEC has in place?

A: For the developed world, the price of oil is not nearly as [important] a factor as it was 15 years ago. But it's a significant factor for the developing world. That's where one needs to be particularly concerned about the depressive effect of a high price. A band of $22 to $28 -- I completely understand why the producers believe that's the right price --- is historically rather high.

Q: Is there a need for your membership to build up reserves?

A: We have a substantial stock that has been carried as an insurance policy by our countries. Let's be comforted by that. Nonetheless, in terms of days covered, that is now at a lower level. In absolute terms, it's higher, but in covered terms, with the elevated levels of today's consumption, it's down to 114 days. In the past, the peak was 145 days. I'd like to see us get back to the highest level.

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