Coming: The Crunch of '79
Iran's oil cutoff threatens higher prices and long gas lines
Iran started turning off its oil spigots last October and completely shut down exports on Dec. 26, but the resulting shortage in world crude supplies has not yet significantly hit oil-thirsty consumers. The crunch of '79, however, will soon become real enough to hurt. The last tankers loaded with Iranian crude have completed their monthlong, 11,000-mile voyage to America's East Coast ports and more and more large U.S. oil companies are cautiously beginning to husband their stockpiles to prepare for a long energy siege.
Last week two more oil majors, following the lead of Exxon and Texaco, announced that they were gloomy enough over the continuing world oil shortfall to begin rationing fuel to big customers. Phillips Petroleum and Shell, the nation's largest gasoline seller, have either cut refinery output or reduced dealers' delivery allocations; the cuts range from Shell's maximum of 8% to Phillips' much more drastic 30%. And the reductions could get worse. "After the second quarter, it's anybody's guess what will happen," says an Exxon spokesman. "It's a day-to-day situation."
Motorists will feel the supply pinch first. Gas stations in Florida and Oklahoma are already moving to reduce the number of hours they stay open. Drivers in Colorado are finding that some stations are either closing early or limiting sales. Airline flights continue to be affected; last week an Eastern Air Lines plane carrying Chairman Frank Borman from Miami to Atlanta was diverted to Tampa to take on fuel. These spot shortages will probably become more acute and will spread when warm weather leads to more driving and the Energy Department moves to ensure that no one region is disproportionately affected. The loss of "sweet" low-sulfur Iranian crude will hit supplies of premium and unleaded gas especially hard.
As supplies fall, the price of oil is going up. Though Saudi Arabia and some other OPEC nations have been pumping an extra 3 million bbl. per day at higher prices to offset some of Iran's export shortfall of 5.5 million bbl. per day, the net world loss of 2.5 million bbl. has still started what some oilmen describe as a wild scramble for crude in the free market. Since mid-December the spot price has nearly doubled, to at least $22 a barrel, vs. the OPEC cartel's price of $13.34. This windfall profit for European oil companies and oil traders acting as middlemen has riled the producing nations, which once again are wielding their monopoly power. They want higher prices for all their oil. "The oil companies are making excessive profits," insists Mani Said Utaiba, the Oil Minister for the United Arab Emirates.
Last week Libya lifted its price by 5%, after increases the week before by Abu Dhabi and Qatar. Others are expected to follow, including Iraq, Nigeria and, according to the latest issue of Petroleum Intelligence Weekly, Syria. A minor non-OPEC producer, it is said to be seeking a 25.5% rise. OPEC has called a special meeting of members for March 26, and prices will be a key topic of discussion. "An enormous increase in oil costs lies ahead," warns Economist Otto Eckstein. Adds Walter Levy, energy adviser to Presidents Nixon, Ford and Carter: "There will be extraordinary pressure on Saudi Arabia to go along with a large increase. There is the potential for a product price explosion that could destroy the economic and financial fabric of the Western economies."
Both the size of any OPEC price rise and the duration and severity of the U.S. oil squeeze will depend on what happens in Iran over the next few months. The country desperately needs to resume exports (though at a lower rate than under the Shah) to lift its economy out of near bankruptcy. The Khomeini regime is confident that the oil flow can be restarted, but just when and at what level is still far from certain. Says John Lichtblau, chief of the Petroleum Industry Research Foundation: "We hear assurances every day, but it doesn't happen." The leftist workers may reject any government plea to return to their jobs, and some damage to the long untended oilfields and refineries may be impossible to repair without the help of foreign technicians.
About the most optimistic prospect is that Iran's exports would rise to 3 million bbl. per day by the middle of this year. In that case, OPEC probably would not be able to sustain more than a modest price increase, and the threat of U.S. gasoline rationing would be removed virtually overnight as the oil companies once again become willing to draw down their reserves in the certain knowledge of new supplies. Shortages would disappear, and the danger of much higher U.S. inflation and deeper recession would be avoided. But there is another possibility. If significant Iranian exports do not resume soon, the U.S. shortfall would continue. It would grow much worse if other OPEC nations, fearful of Iranian-type social unrest, decided that they could manage with less development, lower revenue and fewer exports to a dependent world.
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