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October 3 1, 1 980
Another Oil- Price Shock?
Most of the world's major oil exporters are
located in the world's most politically unstable area. So whenever trouble breaks out
in that
worldwide supplies tend to be
seriously affected and prices shoot skyward.
Prices quadrupled following the 1973 Middle
East War, and they more than doubled again
between late 1978 and early 1980 in the
wake of the Iranian Revolution. Thus, when
hostilities broke out last month between Iraq
and Iran, the industrial world once again
feared the worst outcome.
So far, it hasn't happened. As a result of the
recession and the impact of past increases in prices, worldwide consumption
had already slackened in relation to production, raising inventories to a very high
level. Thus, the initial loss of production from
the Middle East conflict affected prices only
to a modest degree, and that situation may
continue for the remainder of this year. But if
the conflict should continue into 1981, world
oil prices could rise considerably more than
the 12-to-15 percent originally expected for
the year. And if Middle Eastern oil should
disappear completely from the market -for
example, through a blockage of the Straits of
Hormuz-major
oil importing nations could
be in for another serious oi I-price shock.
u.s.
The price surge accelerated in the first quarter
of th is year, as the OPEC average soared at a
1 22-percent annual rate to $28.72 a barrel
(see chart). This surge was somewhat surprising, because worldwide petroleum inventories were already approaching full storage capacity, consumption had dropped well
below year-earlier levels, and spot prices had
fallen substantially below their late-1979
peak of $42.00 a barrel. However, the wide
differential still existing between the higher
spot price and the OPEC contra<;:tprice still
provided the impetus for a further sharp advance in the average contract price.
As time wore on, however, the price rise decelerated to a 15-percent annual rate in the
third quarter of the year. Inventories continuedto build during this period, and spot
prices dropped below at least some of the
contract prices by OPEC cartel members.
Indeed, at OPEC's September meeting in
Vienna, Saudi Arabia was the only nation to
announce a price increase, and it did that only as a means of narrowing the wide differential between its own and other nations'
official price quotations. Other OPEC members were unable to post higher prices in the
face of the worldwide glut, and most announced plans to cut production during the
current quarter to help bring supplies back
into line with demand.
Earlier crises
The present crisis actually began in late December 1978, when the revolt against the
Shah led to the halting of Iranian crude-oil
exports. This step eliminated Iran's normal
supply of 5.5 million barrels a day from the
world market. Other Middle Eastproducers
quicklyoffset some of this shortfall, and Iran
itself partly restored its export potential, but
the Iranian oil-supply shock nonetheless
dramatically affected the world oil market.
The average OPEC-contract price jumped 82
percent between the fourth quarter of 1978
and the fourth quarter of 1979, to $23.54 a
barrel.
Throughout the past several years, the energy
component of the
consumer price index
has reflected these movements in OPEC contract prices. ("Energy" includes gasoline, fuel
oil, electricity and other energy products purchased by consumers.) Energy prices rose
almost37 percent between the fourth quarter
of 1978 and the fourth quarter of 1 979, and
then accelerated to a 53-percent annual rate
in the first quarter of 1980. But the price
advance then sharply decelerated, with only
a 4-percent annual rate of increase in the
third quarter of this year. (Moreover, the energy component of the producer price index
u.s.
ever, if the world lost access to all Persian
Gulf supplies. This could happen if Saudi
Arabia and other major neighboring producers became involved in the conflict, or if
the Straits of Hormuz were closed. Priorto the
conflict, Persian Gulf producers exported 17
million bid through that 24-mile waterwayroughly 40 percent of the non-Communist
world's total oil consumption. The U.s.,
although less dependent than others, obtains
about 9 percent of its total consumption from
that troubled area.
actually declined in September). The slowdown in U.s. retail energy prices reflected a
weaken i ng of energy markets as a resuIt of the
massive inventory buildup which had occurred in the wake of the initial price upsurge
and U.S. recession.
Effectsof conflict
A new situation was created on September
21, when hosti Iities commenced between
Iraq and Iran. Within a few days, those nations' crude oil exports had been cut off,
reducing world oil supplies by 3.7 million
barrels a day -roughly 9 percent of the nonCommunist world's total consumption. The
u.s. was not directly affected, but other nations (such as japan, France, and Brazil) were
heavily dependent on Iraq's normal exports
of 2.7 million barrels a day, while Eastern
European nations were heavi Iy dependent on
Iran's smaller export supplies.
The U.s. thus would be better able to sustain
such a cutoff than most other oil-importing
nations. At the end of September, u.s. stocks
of crude and refined products reached about
1 .40 billion barrels, compared with a minimum acceptable level of 1.15 billion barrels.
That excess inventory-in the amountof250
million barrels-would offset for six months
a total loss of Persian Gulf imports, which
recently have been running at 1.5 million
bid. The U.S. doesn't live in a vacuum, however, but rather in a.tightly interrelated world
market. Any major loss of Persian Gulf oil
wou Id trigger sharing arrangements among
major oil-consuming nations, and would
create severe pressure on spot and contract
prices.
Saudi Arabia, Kuwait and the United Arab
Emirates took steps early this month to make
up for at least part of the loss, by boosting
their combined output to about 1.5 billion
bid above the pre-war level. Their action
reduced the net shortfall resulting from the
Iraqi-Iranian cutoff to about 2 million b/dcoincidentally, about the same amount that
total non-Communist world production had
been running in excess of consumption. This
simply meant that worldwide inventories
would no longer continue to grow as a result
of excess production, and could decline seasonally during the winter due to the normal
increase in cold-weather demand.
Actual situation
In actuality, spot crude-oil prices have firmed
only moderately since September 24, when
Iraqi oil disappeared from the market. The
Rotterdam quotation for Arabian light crude
has risen from $33 to $37 a barrel, or $7
above the Saudi Arabian official price. But
there has been no panic buying, and the
transactions volume has remained rather
light. Indeed, the market seems capable, at
leastthrough the fourth quarter, of handling a
2 million bid net loss of supplies. And with
the situation stabilized at the producer level,
the energy component of the CPI cou Id be
expected to rise at a relatively modest pace,
although more than the 4-percent annual rate
of increase recorded during the third quarter.
Even if the Arab producers reduced production to the pre-conflict level, however,
worldwide inventories could be drawn down
for months before shortages developed.
World petroleum stocks reached a monumental 6.0 billion barrels before the conflict-roughly
500 million barrels above
normal. That excess inventory would offset
for five months the 3.7-million bid sho'rtfall
created by the Iraqi-Iranian cutoff.
Worst-casescenario
Prior to the Iraqi-Iranian conflict, many analysts had been expecting world oil prices to
A very serious situation would arise, how2
rise about 15 percent during 1981, a relatively modest increase in the context of the
past decade. Butthat modest rise could be
expected only on the assumption' that sluggish growth in the world economy, together
with strong conservation efforts, held nonCommunist oi I demand at about the 1 980
level or lower. Moreover, prices could skyrocket, if the Middle East conflict continued
for a prolonged period, or if Iraq and Iran
were unable to bring their damaged facilities
back into production within a short period of
time.
of all Persian Gulf exports, and OPEC contract prices could reach perhaps as much as
$1 00 a barrel within several months' time. A
supply shock of that magnitude would cause
severe economic disruption, force drastic
conservation, and add several percentage
points to the
overall inflation rate. Still,
although the overall situation remains worrisome, the most striking pointtodate has been
the adequacy of supplies and the stability of
prices in the face of a destabilizing conflict in
this crucial area.
u.s.
Yvonne levy
In the worst-case situation, the industrial
nations cou Id experience a complete cutoff
Energy
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BANKING DATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollar amountsin millions)
SelectedAssetsand Liabilities
LargeCommercialBanks
Loans(gross,adjusted)and investments*
Loans(gross,adjusted)- total#
Commercialand industrial
Realestate
Loansto individuals
Securitiesloans
U.s. Treasurysecurities*
Othersecurities*
Demanddeposits- total#
Demanddeposits- adjusted
Savingsdeposits- total
Time deposits- total#
Individuals,part.& corp.
(LargenegotiableCD's)
WeeldyAverages
of Daily Figures
MemberBankReservePosition
ExcessReserves
{+ )/Deficiency(- )
Borrowings
Net freereserves(+ )/Net borrowed(-)
Amount
Outstanding
Change
from
10/15/80
10/8/80
141,338
119,379
34,851
48,555
23,707
1,130
6,577
15,382
48,107
34,957
29,770
64,533
55,900
24,222
67
39
81
221
80
145
95
67
2,006
973
68
- 194
- 215
240
Changefrom
yearago
Dollar
Percent
-
-
-
Weekended
Weekended
10/15/80
10/8/80
139
94
45
38
38
76
6,679
8,019
3,329
6,934
215
751
1,060
280
3,694
3,061
441
8,876
8,710
3,404
5.0
7.2 i
10.6
16.7
0.9
- 39.9
13.9
1.8
8.3
9.6
1.5
15.9
18.5
16.4
Comparable
year-agoperiod
28
127
98
* Excludestradingaccountsecurities.
# Includesitemsnot shownseparately.
Editorialcommentsmaybe addressed
to theeditor (William Burke)or to the author....
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