Time to Act on the Oil Supply

It may soon be time to open the spigots to the Strategic Petroleum Reserve in the U.S. and similar stocks in Europe, Japan, and South Korea. As war with Iraq approaches, global inventories of oil are reaching dangerously low levels. Heating oil, gasoline, and natural gas prices in the U.S. hit near-record highs recently, before falling back. Crude oil has approached $40 per barrel, and the futures markets are extremely volatile. The optimistic scenario for energy is that the U.S. defeats Saddam Hussein quickly and efficiently, and oil prices settle back below $30 per barrel. But there are growing indications that however successful the military is in bringing Saddam down, oil prices may remain high for some time to come. This could further undermine the economic recovery under way unless action is taken.

The real energy problem lies outside Iraq. Venezuela is still producing far below its previous output and, given the political violence in that country, may not come back for months, if not years. Japan has shut down several nuclear reactors and may soon need much more oil. Elections in Nigeria could produce turbulence that spreads to its oil fields. Finally, the U.S. is experiencing its coldest winter in years, and crude stocks are down to 1975 levels. Unlike the situation before the first Gulf War in 1991, there is little extra in the pipeline right now.

If Saddam blows up Iraq's oil fields and takes its current 2.4 million bbl. out of production, prices could spike to $50 per barrel. And while they would probably fall back, they could also stay high for years to come as oil fields in the Middle East are rebuilt. We need more oil in the pipeline now.

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