The Threat to the Oil Flow

By Jay Palmer

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.

The optimism about coping without Iraq's and Iran's wells does not, of course, extend to the remote but horrific possibility that the Strait of Hormuz might be closed to navigation if the level of hostilities escalates. The late Shah once called the 36-mile-wide strait at the southeastern end of the gulf "the West's jugular vein." With oil from the major Middle East producing nations being carried through the strait, supertankers frequently pass the "horn" of Oman on their way to Japan, Western Europe and the U.S. This procession of behemoths carries about 40% of the non-Communist world's total oil supply. If that should be choked off, the industrial nations would face a catastrophic oil shortage and global crisis.

A closing of the strait would immediately halt the vital flow of 17 million bbl. of oil a day now coming out of Saudi Ara bia, Kuwait and the gulfs other major producers. Although the 100 days of oil stocks seem to offer protection, some petroleum experts believe that this provides a misleading sense of security. They point out that 76 days of supply are normally in transit and refineries. Use these up, they warn, and a comparable period will be required to bring renewed supplies to mar ket. The same goes for the 15 days worth of strategic stockpiles maintained by the U.S. and other governments.

Compared with nations like France and Japan, the U.S. seems, in theory, less vulnerable to gulf oil cuts. It gets less than 30% of its oil from the region, vs. 60% for the other two. But, in fact, the repercussions would be worldwide. Under the terms of the International Energy Agency pact drawn up last May, the U.S. and 20 other industrialized nations agreed to share any future oil shortfall. Excess U.S. supply would go toward helping worse-off nations. The hardships too, presumably, would be common to all: scarce heating oil, gas lines, rationing and possibly punishing new taxes to curb demand. "Nothing remotely like that has ever happened," says Oil Expert John Lichtblau of a possible blockade of the strait: "It's like asking what would happen if an atom bomb fell on New York." Adds fellow Expert Daniel Yergin: "The situation is so uncertain, we should operate on the assumption that the worst will happen."

It would not be easy to close the Hormuz Strait, at least not directly. Unlike the Suez and Panama canals, the navigable, 26-mile-long tanker channel is an average of seven miles wide and 216 ft. deep. A fully laden, 500,000-ton giant tanker would be able to circumvent or even sail right over a deliberately sunk vessel. However, it would not be difficult to bring the oil traffic to a halt indirectly. All it would take is an attack against a tanker by a plane or patrol boat. Even if it missed, that might be enough to scare off navigation and thus establish an effective blockade by deterrence.

Fortunately and somewhat surprisingly, the furious fighting of the opening days of the war had scant effect on traffic through the strait. True, Lloyd's of London continued to issue insurance policies only at premiums that were 300% higher than before the war. Many cautious captains chose to lie at anchor at a safe dis tance and wait for more peaceful passage. Nevertheless, some 600 ships were sailing successfully, if gingerly, in the gulf. As yet, none on the high seas had been bombed, strafed or sunk.

--By Jay Palmer. Reported by Richard Hornik/Washington and Janice Simpson /New York

With reporting by Richard Hornik, Janice Simpson

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