At some level, the official word about oil shortage might be correct. Officially, there is no shortage. And, indeed, there is nothing-suddenly empty storage tanks and pipelines, for example-to which someone can point and declare, "Sure enough, shortage."
To the market, however, shortage exists now. To the market, a shortage has existed since it became clear that crude oil from Iraq and Kuwait would be unavailable more than a few weeks.
MORE THAN SEMANTICS
This divergence of views about shortage involves more than semantics. It clouds the information upon which consumers base decisions in a troubled market. And it might predispose policy makers toward harmful mistakes.
The market seldom provides hard evidence-those surprise voids in tanks and pipelines-for shortage. The market reacts to anticipated shortage before the voids occur. It constantly asks two questions about the future: "How much oil will the world need?" and "How much oil can the world produce?" And it tries, by adjusting current prices, to make the answers match.
When the effort is motivated by an anticipated deficiency in supply relative to demand, when the market, in other words, is constrained by supply instead of by demand, there is shortage. The market made the shift on Aug. 2.
Before Iraq invaded Kuwait, the International Energy Agency was projecting fourth quarter consumption outside centrally planned economies at 55.3 million b/d. With production outside the Organization of Petroleum Exporting Countries at capacity, the implied call on crude from OPEC amounted to 24.6 million b/d-about 3.4 million b/d less than the group's available capacity.
Since the invasion, attention has focused on loss of the 4.2 million b/d of crude that Kuwait and Iraq had been exporting and on possible replacement supply. A more important loss is 5.7 million b/d of production capacity in Kuwait and Iraq. Without it, OPEC collectively can produce perhaps 22.3 million b/d in the fourth quarter-2.3 million b/d less than preinvasion projections of demand for its crude.
To a forward-looking market, to a market constantly weighing the world's oil needs against its ability to produce, that's shortage. It's why prices have jumped, which is why demand is falling and why new sources of supply will appear. For example, IEA in August trimmed its projection for fourth quarter demand by 800,000 b/d. And Saudi Arabia says it might accelerate plans to boost production capacity.
Market response has been so swift that the shortage might disappear before officials of consuming countries acknowledge that it existed at all. To be sure, they have reasons to understate the problem. They want to discourage panic buying. They may want to avoid possibly embarrassing tests of international oil sharing agreements and strategic reserve systems. But understatement creates confusion, which eventually leads to errors of policy.
DENYING SHORTAGE
Last week, President Bush joined other consuming government leaders in denying the existence of shortage. He attributed fluctuations in the oil price to "speculation as to what it might be in the future." That's a handy way to dismiss a vital function of the market. It's a way to take no action on energy policy. It's a way to aggravate the anger of gasoline consumers perplexed by price increases.
But something is pounding on the world economy with both fists, and it's not just the cost of Operation Desert Shield. Leaders might ride out the oil shortage in a vain search for empty tanks and pipelines. But if their strategy produces expensive mistakes, they'll be less able to explain and deal with the recession likely to come next.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.