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Issues » Fact Sheets
Oil Fact Sheets
The Oil Price Crisis – The Global View, Iraq, and More
The Independent Petroleum Association of America has long championed competition in capitalistic marketplaces. Unfortunately, capitalistic forces do not drive the global crude oil market. Rather, it is a market defined by geopolitical forces – a market where governments in producing countries make choices that affect a critical domestic resource that is the linchpin of a healthy and secure U.S. economy. U.S. actions must be taken in this context with the central question being: how can we best maximize the value and future of our national oil resource?
The conditions of the recent price crisis are an exemplary case. What began as one situation shifted into a vastly different one.
In late 1997, a variety of factors started the current oil price crisis. Asian economies that had been the strongest growth sector in oil demand began contracting as they suffered the initial effects of their economic collapse. A warmer than normal Northern Hemisphere winter – particularly in the U.S. and Europe reduced demand and failed to work off normal inventories that had been stored. Venezuela and Saudi Arabia began a market share battle without recognizing the existence of a constrained market. Surpluses developed and prices fell. Because the U.S. economy remained robust, producer countries shifted crude oil toward the U.S. as their normal markets were constrained, further damaging U.S. producers.
These conditions compelled OPEC and non-OPEC producing countries to manage their production, much as the Texas Railroad Commission and other state oil control commissions had done when the U.S. was the world’s largest producer. While reductions were made, the commodity market reaction continued to suppress prices as reports of weakened demand and overproduction permeated the news.
Continuing low prices were having worldwide consequences, crippling economies – and perhaps destabilizing governments – of producer countries like Russia, Indonesia, Venezuela, Mexico, and even Saudi Arabia. By year-end 1998 prices were at historic lows and the emerging role of Iraq became evident.
At the beginning of 1998 Iraq was exporting about 700,000 B/D into the world market. However, two modifications to the UN Sanctions program and other events changed Iraq’s position. First, the UN sanctions program increased Iraq’s allowable oil sales limit to $5.25 billion every six months – an amount that allows unlimited exports. Second, Iraq was allowed to expend $300 million every six months to enhance its productive capacity.
As this graph demonstrates, while other OPEC countries reduced production to control inventories, Iraq systematically increased its production and exports. By early 1999, Iraq was exporting 2.5 million B/D and had become the world’s swing producer of oil. As other countries reduce production, Iraq’s willingness to increase its production and sell at low prices keeps prices low. At a geopolitical level this role gave Saddam Hussein the victory he lost in Kuwait. He controlled oil prices and was able to punish his enemies – Saudi Arabia, Kuwait, Iran, and, by undermining our domestic production, the United States. It represented a clear failure of the UN sanctions at two levels – it had failed to provide humanitarian aid to the Iraqi people and it had given Saddam Hussein an oil weapon he could not win on the battlefield.
Low prices in 1998 and early 1999 created another risk – the potential for a subsequent price shock. Worldwide surplus capacity exceeded demand by only about 4 percent by the end of 1998. With demand increasing at 1.5 to 2.0 percent annually, shortages could occur with 2 to 3 years at constant production levels. But without adequate investment in new production and maintenance of existing capacity, depletion of existing resources will shorten this time frame. In the U.S. this is what is happening. Existing capacity is being shut-in, much of it forever. When it is gone, the U.S. will be more dependent on Middle Eastern oil supplies. Then, and perhaps now, Saddam Hussein could drop his exports and drive prices up to damaging levels.
These factors argue for one clear action. Oil is America’s energy lifeline. Domestic production is its true strategic petroleum reserve. National policy must value this resource in ways it never has before and develop specific actions accordingly.
In the short-term, in response to this crisis, America must be engaged with other producer nations to steward these resources. It must find an Iraqi UN sanctions program that delivers humanitarian aid and takes the oil weapon out of Saddam Hussein’s hands.
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