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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 U Ol8U!4seM. 4Eln • u08 a10 • epeAaN • 04ePI !!eMEH • E!UJOJ!lEJ • EUOZ!JV' • e>jsEIV JJ d( CG> 'llle:) 'OJSpueJ::I ues (;S'L 'ON GIVd 39V 1 S0d 's'n llVW SSV1:) 1SMI:J 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. em
