The Gulf War and Oil

There is little to justify the dire warnings some specialists have been issuing that the intensified Iran-Iraq war could dry up the world oil glut, sending oil prices soaring and bringing back gas lines in the U.S.

In fact, the fighting should strengthen Saudi Arabia's hand in trying to hold the line on crude oil prices and in dissuading some members of OPEC from selling their oil through the "back door" for spot-market prices below the $34-a-barrel OPEC market price.

So far, spot-market prices, averaging around $30 a barrel, have failed to respond dramatically to the renewed fighting. This is because there is still a surplus in the world's oil supply. Spot prices actually started coming down after an OPEC meeting broke up in disagreement over production quotas in early July. However, the official $34 price still prevails for most of the world oil trade, and most experts agree that price stability is more important than short-term fluctuations.

When there is an upward pressure on oil prices in the West, it is still inflation that causes it. But now it is the slump in the industrialized world's demand for crude oil, largely, that is responsible for the surplus in supply. And the Gulf war is unlikely to affect current conditions, even if Iraq and Iran, both normally major OPEC producers, should find their productive capacities wiped out. There are plenty of other producers who are more than willing to make up any lost production.

At the time of the latest Iranian offensive in Iraq, both countries were just beginning to get their oil fields started up again after 20 months of war. Iran's production was back to between 1.5 million and 2 million barrels a day (compared with 6 million under the Shah) and Iraq has been exporting about 700,000 barrels a day. Neither country exports much to the U.S.

U.S. official and commercial inventories of crude oil are reasonably healthy, although oil companies have been increasingly drawing down their stocks and the government has not been filling its "strategic petroleum reserve" as quickly as some critics would like.

Oil experts agree that U.S. consumers will see a rise in prices at the pump sooner or later—certainly when the country eventually starts to pull out of the recession. But for the moment, Americans should benefit from Saudi Arabia's efforts to keep OPEC production down according to agreed country quotas, thereby holding the price steady while the glut lasts.