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March 9, 1 979

Oi I Shortage?
Because of the rapidity of the changeover, Americans undoubtedly are confused about what Iran's political
upheaval means for U.S. and world oil
supplies. Their confusion has been
aggravated by the seemingly contradictory statements made by various
public and private figures with regard
to the magn itude of the shortages that
cou Id confront the United States and
other oil importing nations as a result
of the loss of Iranian supplies.
Energy Secretary Schlesinger has
presented a rather gloomy assessment
of the potential impact, stressing that
a prolonged Iranian oil-export cutoff
could result in shortages "prospectively
more serious than the 1 973-74 Arab
embargo." Other officials, in constrast,
have tended to downplay the seriousnessofthe situation, especially now that
some Iranian oil is being exported once
again. A strong case can be made for
either view, depending upon the assumptions made with regard to two
very uncertain developments - 1) the
volume of Iranian oil production and
exports that will beforthcoming during
the remainder of this year, and 2) the
production responses of the other major oil-exporting nations. The following
analysis may help clarify the current
supply situation and suggest several
alternative scenarios for the future.

Net Iranianlosses
Iranian crude-oil production - which
had been running at about 6.1 million
barrelslday prior to the revolt against
the Shah - was brought to a complete
halt on December 26 by striking oil
workers. Production was restored
rather quickly to about 650,000 bId

and remained at that level until early
March. Butthatamountwas barely sufficient to meet domestic requirements,
so that the world oi I market for the past
two months has been denied Iran's
normal supply of 5.5 million bId.
Initially a large share (about 3-4 million

bId) of this total short-fall was offset by
increased production from other producers, mainly Saudi Arabia, leaving
a worldwide net shortfall of around 2
million bId. Consequently, the net
shortfall resulting from the Iranian
cutoff amou nted to about 4 percent of
total non-Communist world oil requirements. The net loss to the United States
amounted to about 500,000 bId, equivalent to about 2.5 percent of total U.S.
oil consumption.
Beginning in early February, the net
shortfall widened somewhat, however,
when Saudi Arabia imposed a new ceiling of 9.5 million bId on that nation's
monthly oil production for the first
quarter of 1 979. That "emergency"
ceiling is higherthan the 8.5 million bId
annual limit initially scheduled for
1 979, but it has required a cutback in
production from the 10.3 million bId
peak output level reached in January in
response to the Iranian cutback. Furthermore, although Iran raised its production to 1 .7 million bId in early
March and resumed a minimal amount
of exports, the net shortfall throughout
the non-Communist world remains at
somewhat over 2 million bId.
International oil companies have offset
the net loss in worldwide supplies by
reducing their inventories more than
normally would have been run off dur(continued on page 2)

;""""'";U',""

expressed in this lleVVsletter do not

ing this season of the year. Petroleum
inventories throughout the non-Communist world had reached a level of
about 3.8 billion barrels at the end of
1 978, of which 1.1 billion barrels were
held in this country. These worldwide
stocks were equivalentto about 70 days
of normal consumption levels - a
somewhat larger supply than normal
because of the hedge buying that had
taken place late in 1 978 in advance of
an expected OPEC oil-price increase.

million bid limit after the first quarter;
and 3) other OPEC members would
trim their output by (say) 1 million bid.
Under the best-case scenario, 1) Iranian
oil exports would rise gradually from
the current minimal level to at least 4
million bid by year-end, and 2) other
OPEC members would maintain their
production at currently expanded
levels. The most likely case, as usual,
wou Id I ie somewhere between these
two extremes.

Because of the higher-than-normal
level of stocks at year-end, Secretary
Schlesinger initially argued that there
was no immediate danger of a significant global oil shortage. But he also
emphasized that if the export,cutoff
continued beyond mid-year, a severe
shortage could develop by next winter
at the latest. This is because producer
inventories normally are replenished
during the second and third quarters to
meet peak winter demand, and acontinuous abnormal drawdown of inventories wou Id reduce stocks to a critically
low level later in the year.

Iranian oil production at best is likely to
reach only about 3 million bid by year
end. It is doubtful that production could
be'raised above that level without the
help of foreign technicians, most of
whom have. fled the country.
,even if technical experts were available, it is doubtful that the new regime
- despite its need for foreign exchange
- would wa'nt to 'produce flat out at
maximum levels. Some government
officials are pressing for a ceiling on
production of around 3 million bid to
conserve Iranian oil resources. Moreover, the Saudi government already has
indicated that it plans to restore its
normal8. S million bid production ceiling afterthe first quarter, and this would
offset at least part of any increase in
Iranian production. That combination
of output levels would leave the worldwide shortfall at a level of around 2
million bid, requiring reductions in
consumption, since inventories cannot
continue to make up the deficit
indefinitely.

Possible
scenarios
A number of scenarios can be developed with regard to the potential shortfal l - i.e., deficit in production -that
could develop this year if world consumption were to remain at the levels
projected prior to the Iranian crisis.
The different outcomes depend upon
the alternative volumes of production
and exports assumed to be forthcoming
from Iran and other OPEC cartel
members.
Under the worst-case scenario,
1) Iranian production would continue
to just about meet that nation's internal
needs, resulting in minirnal or zero
level of exports; 2) Saudi Arabia would
reduce its production to the normal 8.5
2

With a prolonged shortfall ofthat magnitude, the present situation could become more serious than the 1 973-74
Arab embargo. At the height of the
embargo, non-Communist world oil
production dropped by about 3-4 million bid below the levels reached in the
immediate pre-embargo period. The

Percent

20

Dependence

on Iranian Imports'
(1977)

15

10

5

o
'Iranian imports as percent of total
consumption of crude oil and refined products .
.....

shortfall amounted to 1 0 percent of
projected world consumption, and the
U.S. shortfall was even greaterunderstandably, si nce the embargo was
directed primarily against the United
States. Butthe 1 973-74 Arab embargo
lasted only four months, whereas the
Iranian curtailment could last indefinitely, making its impact potentially
greater. I f the shortfall itself were to
increase as a resuIt of an exceptionally
low level of Iranian exports and a cut in
Saudi Arabian production, the Iranian
situation undoubtedly could lead to a
more serious outcome than the 1 97374 embargo.

lowering demand
If the.worst.,.casescenario were to
occur, consuming nations would adopt
mandatory conservation measures to
help lower consumption. Higher prices
also wou Id serve to reduce consumption below projected levels. Spot
prices, which cover perhaps 5 percent
of all oil sales, already have risen as
much as $1 O/barrel above the current
$1 3.34/barrel official contract price for
Saudi light crude. In response to this
spot-price increase, Saudi Arabia has
added a $1 . 20/barrel"premium" for
production above its 8.5 million bid
production ceiling, while a number of
other OPEC producers have added that
surcharge (or more) for all sales. These
developments make it likely that the
OPEC governments will readjust posted
crude-oil prices more than the scheduled 14.5 percent increase by year-end.
But in any case, prices realized in the
world market wi II rise far more than the
increase originally planned.
Indeed, the Energy Department (in a
pessimistic scenario) claims that the
official benchmark price for crude oil
could reach $1 8/barrel by year end,
representing a 42-percent increase over
3

- ... ...•.•-...••. .......................... _•.....•._ _.......

- - - - - - - -

the course of 1979. (Also, the price of
unleaded gasoline could reach $l/galIon by year-end.) Based on that crude
price increase, the nation's oil-import
bill could reach $55-60 billion this
year, up from $42 billion in 1978.
The Congressional Budget Office has
attempted to estimate the impact on the
domestic economy ifthe current
shortfall of around 500,000 bid were to
continue for a full year. In that event,
the growth in real GN P would be reduced by 0.5 percentage point, while
the nation's unemployment and inflation rates would rise by an additional
0.2 and 0.4 percentage point, respectively, in 1 979. I fthe shortage were to
grow to 1 million bid, which is still a
distinct possibility, the adverse economic impacts would double.

u.s.

The U.S. and other industrialized
nations belonging to the International
Energy Agency - an organization designed to cope with energy emergencies
- have agreed to voluntarily reduce.
their oil consumption by 5 percent in
order to eliminate the current shortfall.
Indeed, government appeals to the
public for voluntary conservation already have been made, both here and
abroad. But the Carter Administration
also has submitteda set of mandatory
conservation measures to Congress for
use if necessary. These wou Id focus on
reductions in discretionary forms of
consumption such as heating, cooling,
lighting and transportation. Included
would be a measure for compulsory
weekend closing of gasoline stations
and, as a last resort, gasoline rationing.
The objective is to reduce consumption in those uses which will have the
least adverse effect on industrial
production and employment.

Yvonnelevy

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BANKINGDATA-TWELFTHFEDERAL
RESERVE
DISTRICT
(Dollaramounts millions)
in

Selected ssets liabilities
A and
large Commercial
Banks

Amount
Outstanding
2/21/79

Change
from
2/14/79

Change
from
yearago@
Dollar Percent

121,294
NA NA
Loans
(gross,
adjusted) investments*
and
881
Loans
(gross,
adjusted) total#
771
99,191
Commercial industrial
and
28,897
70
Real
estate
35,238
71
Loans individuals
to
20,317
72
Securities
loans
2,001
336
U.S.
Treasury
securities*
7,623
25
Othersecurities*
14,480
85
Demand
deposits total#
41,110
1,295
Demand
deposits adjusted
28,310
- 1,529
Savings
deposits total
29,685
42
12
Timedeposits total
#
50,911
Individuals, & corp.
part.
41,353
25
(Large
negotiable
CD's)
18,873
26
W!eIdyAverages
Comparable
\l\eekended
\l\eekended
year-ago
period
of Daily Figures
2/21/79
2/14/79
Member
Bank
Resefl'Ve
Position
Excess
Reserves )/Deficiency )
(+
(42
12
23
22
Borrowings
75
64
Netfreereserves )/Netborrowed( )
(+
87
20
41
Federal
Funds Seven
large Banks
1,535
Netinterbank
transactions
2,129
637
[Purchases )/Sales
(+
(-)]
Net,U.S.
Securities
dealer
transactions
572
285
432
[Loans+ )/Borrowings
(
(-)]
* Excludes
trading
account
securities.
# Includes
itetTISot shownseparately.
n
@ Historical ataarenot strictly comparable to changes the reportingpanel;
d
due
in
however,
adjustments
havebeen
appliedto 1978datato remove muchaspossible effeclsof thechanges coverage.
as
the
in
In
addition,or someitetTlS,
f
historical ataarenot available to definitional
d
due
changes.
Editorial
comment§ ay be addressed theeditor(WilliamBurke) to theauthor..•.
m
to
or
Freecopies thisandother Federal
of
Reserve
publications be obtained callingorwriting the Public
can
by
Infonnation
Section,
Federal
Reserve ank SanFrancisco, Box7702,SanFrancisco
B of
P.O.
94120.
Phone
(415)
544-2184.

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