August 21, 2008
Op-Ed Contributors
 All the Oil We Need By EUGENE GHOLZ and DARYL G. PRESS

WHILE oil prices have declined somewhat of late, the volatility of the
market and the political and religious unrest in major oil-producing
countries has Americans worrying more than ever about energy security. But
they have little to fear — contrary to common understanding, there are
robust stockpiles of oil around the globe that could see us through any
foreseeable calamities on the world market.

True, trouble for the world's energy supplies could come from many
directions. Hurricanes and other natural disasters could suddenly disrupt
oil production or transportation. Iran loudly and regularly proclaims that
it can block oil exports from the Persian Gulf. The anti-American rhetoric
of President Hugo Chávez of Venezuela raises fears of an export cutoff
there. And ongoing civil unrest wreaks havoc with Nigeria's output.

Even worse, this uncertainty comes in the context of worrisome reports that
oil producers have little spare capacity, meaning that they could not
quickly ramp up production to compensate for a disruption.

But such fears rest on a misunderstanding. The world actually has enormous
spare oil capacity. It has simply moved. In the past, major oil producers
like Saudi Arabia controlled it. But for years the world's major consumers
have bought extra oil to fill their emergency petroleum reserves.

Moreover, whereas the world's reserve supply once sat in relatively
inaccessible pools, much of it now sits in easily accessible salt caverns
and storage tanks. And consumers control the spigots. During a supply
disruption, Americans would no longer have to rely on the good will of
foreign governments.

The United States alone has just more than 700 million barrels of crude oil
in its Strategic Petroleum Reserve. Government stockpiles in Europe add
nearly another 200 million barrels of crude and more than 200 million
barrels of refined products. In Asia, American allies hold another 400
million barrels. And China is creating a reserve that should reach more than
100 million barrels by 2010.

Those figures only count the government-controlled stocks. Private
inventories fluctuate with market conditions, but American commercial
inventories alone include well over a billion barrels. Adding up commercial
and government stockpiles, the major consuming countries around the world
control more than four billion barrels.

Some policy makers and analysts worry that these emergency stocks are too
small. For example, they sometimes compare the American strategic reserve to
total American consumption, so the reserves appear dangerously inadequate.
The United States consumes about 20 million barrels of oil every day, so the
Strategic Petroleum Reserve could only supply the country for 35 days.
(Furthermore, the United States could not draw oil out of the reserve at
anything approaching a rate of 20 million barrels per day.) This is why
President Bush in his 2007 State of the Union address called for doubling
the strategic reserve.

But this vulnerability is a mirage. The size of plausible disruptions, not
total consumption, determines the adequacy of global reserves. The worst oil
disruptions in history deprived global markets of five million to six
million barrels per day. Specifically, the collapse of the Iranian oil
industry during the revolution in 1978 cut production by nearly five million
barrels a day, and the sanctions on Iraq after its conquest of Kuwait in
1990 eliminated 5.3 million barrels of supply. If a future disruption were
as bad as history's worst, American and allied governments' crude oil stocks
alone could replace every lost barrel for eight months.

Current fears about energy security focus on Iran. For example, Tehran could
sharply cut its oil exports to drive up global prices. Of course, this would
be the economic equivalent of suicide terrorism: oil exports provide more
than 80 percent of Iranian government revenues, and a major cutback would
wreck Iran's economy.

It would also be futile because the industrialized world could easily
replace Iranian oil. Iran only exports 2.5 million barrels each day. A
coordinated release of reserve crude by the United States and its European
and Asian allies could replace missing Iranian barrels for a year and a
half. Iran is vulnerable; the West is not.

Of course, we are told, Iran might be able to take Saudi, Kuwaiti and Iraqi
oil off the market, too, by attacking oil tankers as they pass through the
Strait of Hormuz, along Iran's coast. It's conceivable, but not likely.

Significantly impeding oil traffic would require a sustained military
campaign. Dozens of tankers carry more than 15 million barrels of crude
through the strait every day. The water is so deep that the navigable
channel for supertankers is 20 miles wide at its narrowest point. There is
simply too much traffic across too much space for the waterway to be easily

Countries have attacked oil infrastructure before, and the results were
underwhelming. During the Iran-Iraq war, Baghdad and Tehran struck each
other's oil terminals and tankers repeatedly, but they proved to be very
resilient targets. Rugged structures and quick maintenance meant that Iran's
Kharg Island terminal kept pumping despite repeated bombings. Tankers, which
dwarf aircraft carriers, have thick hulls designed to prevent oil spills
and, when attacked, proved to have few sensitive parts where a "lucky" hit
could cause serious damage. They managed to keep the oil flowing through
Persian Gulf waters throughout the Iran-Iraq war.

Today, Iran has more advanced anti-ship weapons, and it could surely harass
commercial tanker traffic. But it would be hard pressed to sustain an
anti-shipping campaign sufficient to reduce oil flows drastically for weeks
on end, especially in the face of an intense military response. Even if Iran
were able to reduce oil flow though the strait by, say, 30 percent, global
reserves could replace losses of that magnitude for more than nine months —
plenty of time for the Navy to counter Iranian military operations.

Make no mistake, any major disruption — from a war, a terrorist attack or a
natural disaster — would make prices jump until markets realized that the
pipes feeding crude into refineries were not going to run dry. But
recognizing the great capacity of global reserves to weather disruptions
will go a long way to minimizing panic.

Emergency reserves have their limits. They cannot free the industrialized
world from the underlying economic fundamentals that drive energy prices. As
the global economy grows, demand for energy will rise and oil prices may
remain high.

Government-controlled stockpiles should not be used to try to smooth out
short-term blips in global supplies, the normal variations that companies
account for with their inventories and financial hedging. Public inventories
are a blunt instrument designed to protect the oil market as a whole from
major disruptions — national strikes, hurricane damage, wars and attempts at
geopolitical blackmail.

Paradoxically, our exaggerated fears over energy security have some benefits
— for example, they may reduce the United States' inclination to attack
Iran. But they also have big costs. Politicians could be induced to try
costly solutions for problems that don't exist, like President Bush's
commitment to double the size of the Strategic Petroleum Reserve. Western
leaders may also pay too much heed to an oil producer's saber rattling. And,
finally, exaggerated fear may encourage oil-market traders to panic at the
first sign of even a small disturbance. When it comes to energy security,
let's not let fear get the best of common sense.

Eugene Gholz is an associate professor at the Lyndon B. Johnson School of
Public Affairs at the University of Texas at Austin. Daryl G. Press is an
associate professor of government at Dartmouth College.

Michael Balter
Contributing Correspondent, Science
Adjunct Professor of Journalism,
Boston University

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