War and Oil
With John Felmy
Chief Economist, American Petroleum Institute
Friday, March 14, 2003; 11 a.m. ET
During the Iraqi retreat from Kuwait in 1991, Saddam Hussein ordered his troops to destroy oil facilities and set fire to oil wells. As another conflict between the United States and Iraq looms, observers worry that Hussein will sabotage Iraq's oil industry and that his forces could attack neighboring nations' energy infrastructure, causing economic damage to international energy markets.
Economist John Felmy was online Friday, March 14, at 11 a.m. ET to discuss how a war with Iraq might affect the region's oil industry, specifically oil producers Kuwait and Saudi Arabia, as well as oil consumers in the United States.
Felmy is chief economist and director of API's Policy Analysis and Statistics Department. He has more than 20 years of experience in energy, economic and environmental analysis. He earned a bachelors and masters in economics from The Pennsylvania State University and a Ph.D. in economics from The University of Maryland. Felmy is a member of several professional associations including the American Economics Association and the International Association for Energy Economics and is currently vice president of the U.S. Association for Energy Economics.
The transcript follows.
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Kansas City, Mo.: With little or no spare world oil production capacity and what seems to be an inevitable natural gas supply crisis looming for next winter, is it prudent to launch a war with Iraq at this juncture?
Also could you estimate the downtime of oil production and processing in the event of a "dirty bombing" of Saudi or Kuwaiti oil fields?
John Felmy: We have no comment as regards to the prudence of war. That is solely President's Bush's decision.
You are absolutely right to be concerned about natural gas. Inventories are low and production is constrained by limitations on drilling for natural gas in promising areas and demand continues to grow. This reinforces the need for National Energy legislation to get us off the treadmill we have experienced in the past several years. For more information on our positions, please go to www.api.org.
The potential scenarios that could occur are far to many to speculate about downtime.
washingtonpost.com: Thanks for joining us, Mr. Felmy. Can you put in perspective just how reliant the American economy is on Middle Eastern oil -- and Iraqi oil in particular? Have we begun to shift our needs for oil to other sources?
John Felmy: The U.S. gets somewhat more than 2 million barrels per day from the Middle East out of a total consumption of 20 million barrels per day and 11 million barrels per day of imports. Iraqi imports averaged about 440,000 barrels per day in 2002 and 600,000 barrels per day in January 2003. Actually, due to the Venezuela strike, we increased our imports from Iraq. Recent reports indicate that Iraqi imports are declining as Venezuela increases it production.
Bethesda, Md.: What is happening to gas prices in California and what will happen in the event of supply disruptions caused by war?
John Felmy: Gas prices in California are rising for two broad reasons. First, they are rising due to the increased cost of crude oil. Crude oil prices have increased 30-35 cents per gallon over the past three months and gasoline prices have increased nationwide about 34 cents over the same period.
California also has a major problem due to two events. Environmental regulations forced a large new section of California to use a cleaner burning gasoline that is more expensive to produce. California also banned the use of an additive MTBE and ethanol is now being substituted for it. This conversion is very expensive because of the blending requirements. The California Energy Commission released a report exactly one year ago that indicated the potential problems with this changeover and unfortunately, it appears that some have happened. To solve this problem requires national energy legislation that changes our current gasoline laws to put some flexibility in the system.
I can not speculate on potential supply disruptions. The industry is committed to supplying consumers with the gasoline and other petroleum products they need.
Alexandria, Va.: If Saddam does burn up all his oil mines, is there any way to tap into some of our resources that haven't been touched yet?
John Felmy: The U.S. potentially has a vast amount of oil and natural gas that could be developed if we could drill for these resources in the most promising areas. These areas include Alaska, Western lands and the Outer Continental Shelf. These areas do not include protected areas such as Federal and State Park lands.
Washington, D.C.: Prices at the pump have been sky-rocketing in recent months due to the high crude prices. At the same time, gasoline inventories are going down. How high can prices go? And how troubling is the gasoline inventory situation?
John Felmy: The gasoline inventory situation is in pretty good shape at this point. Inventories are only slightly below average -- about 3 percent. In the next few weeks, the industry will be producing relatively less heating fuel and making more gasoline for the summer driving season. It is too soon to tell what will happen to supplies given all the other uncertainties including the potential for conflict in Iraq, and strikes in Venezuela and Nigeria.
Washington, D.C.: Mr. Felmy,
If America gets only 2 of its 11 million imported barrels of oil a day from the Middle East can you please lay out where the other 9 barrels are coming from?
John Felmy: From U.S. production of crude oil and natural gas liquids from Alaska, California, Texas, Louisiana and other states including my home state of Pennsylvania -- The First Oil State!
Washington, D.C.: Someone suggested to me that the U.S. will seize Iraqi oil to help pay for the war. Is there any truth to that? Are Iraqi oil reserves own by the Iraqi government or a private entity? What would happen to that oil if the Iraqi government was overthrown?
John Felmy: Secretary of State Powell said that the Iraqi oil would be owned by the Iraqi people. The Iraqi oil fields are now controlled by Saddam Hussein. Iraqi oil is sold under the UN Oil for Food program. The U.S. industry has no contracts to produce oil in Iraq and merely buys oil under the UN program through intermediaries. What could happen after the war is completely unknown.
Arlington, Va.: Good afternoon --
The Bush administration's decision last year to purchase oil for the petroleum reserve has decreased the world's oil supply. According to the laws of supply and demand, when quantity of supply decreases as quantity demanded remains high prices will increase. Is that what's happening here?
Democrats Assail Bush Oil Policy (Post, March 6, 2003)
John Felmy: The claims that the President's decision to increase the size of the SPR has had dramatic impacts on the world oil price are absurd. The maximum amount of oil injected into the SPR was about 130,000 barrels per day. That amount is less than 0.2 percent of world supplies. Any price increase due to this would be very small. Second, about 17 of the 49 million barrels put back into the SPR were required due to the release that President Clinton conducted in 2000.
washingtonpost.com: Mr. Felmy, could you clarify your answer on oil imports?
John Felmy: Oil imports in 2002 are as follows in million barrels per day:
Saudi Arabia 1.55
and many others. We import from about 30 countries worldwide.
Sterling, Va.: Would other countries be willing, or have the capabilities to increase production if the Iraqi oilfields were damaged in order to offset America's import loss of Iraqi crude oil?
John Felmy: OPEC has stated that they will increase production if Iraqi supplies are lost due to conflict. Other non OPEC producers could possibly increase their production and have the economic incentive to do so at current prices. The possible need for additional production will be a function of the length of the conflict and actions by Iraqi military.
Bowie, Md.: How much is in the Strategic Petroleum Reserve, and how long can it tide us over in a short-term disruption?
John Felmy: There are about 600 million barrels of oil in the SPR. This could replace total imports from the Middle East for about 300 days.
New York, N.Y.: Hi Mr. Felmy, my question is what does the American Petroleum Institute think about efforts like raising the fuel economy on automobiles?
In general does the API agree that America's interests would be better served if we reduced the amount of OIL we use in America, and thus deprived the regimes in the Middle East, whom are committed to our destruction, from their primary source of funding?
John Felmy: API is committed to developing a comprehensive national energy policy that promotes conservation, energy efficiency, renewable energy, additional domestic supplies of energy and improved infrastructure to deliver energy to American consumers. Focusing on only one aspect of this policy will leave us in the same situation we are in. The oil industry has invested heavily in energy efficient technology for vehicles such as fuel cell vehicles and in renewable energy such as solar, wind and geothermal.
Artemas, Pa.: Can you comment on the work of Colin C. Campbell, Jean Laherrère, Matthew Simmonds and others in their prediction of world peak oil production occurring within the next five years and then exhibiting a decline very similar to the production decline experienced here in the U.S. after our own peak in 1970? And their prediction that natural gas production decline curves are much steeper than oil production decline curves? Lastly can you comment on public statements within Europe by BP/Amoco and others, that the world is in fact entering peak oil production, regardless of technical advances in extraction technologies?
John Felmy: Folks have been forecasting the decline in oil production since the 1870s. In 1874 the state geologist of my native Pennsylvania predicted we would run out of oil in 10 years -- and that was when it was only used for kerosene! We have continued to improved our technology to find more oil than we consume and our reserves continue to grow.
State College, Pa.: Dr. Felmy:
Why do gasoline prices always rise much faster than they fall?
John Felmy: Many studies have revealed that gasoline prices lag crude oil prices. Most studies indicate that gasoline prices rise and fall in direct relationship to crude oil prices. Unfortunately consumers are less aware of crude oil prices than gasoline prices at the pump, which are posted at the local gas station and as a result they only see gasoline prices rising or falling and do not know how closely they parallel world crude oil prices.
Harrisburg, Pa.: I am confused. Do I read on this chat that we increased the amount of oil we imported from Iraq? For all those people who want to boycott French products, maybe we should first consider boycotting Iraqi products? Why do we still import oil from Iraq: are these existing contractual obligations, or is is economic reality this needs to be done, or why?
John Felmy: Prior to the strike in Venezuela, we imported about 8-9 percent of our oil consumption from that country. With that loss, the industry sought alternative sources to supply American consumers and could be used in our refineries. Some Iraqi and Venezuelan oil are similar in properties, so US companies bought Iraqi oil under the UN Oil for Food program. Our companies are committed to supply consumers with the petroleum they need to get to work, educate their children, heat their homes and enjoy the benefits of the U.S. economy.
That wraps up today's show. Thanks to everyone who joined the discussion.
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