The Center for Security Policy today called upon President Bush to take steps to stabilize the international oil market currently being traumatized by Iraq’s apparently successful occupation of Kuwait. Specifically, the Center recommends that the United States and its allies agree to a firm policy on the immediate release of Western oil stocks in the event of any disruption of oil supplies or price increases caused by speculators.
Such a policy was adopted in the winter of 1983-84 by President Reagan and proved highly successful in deterring significant increases in oil prices or shortages during the period when the "tanker war" in the Iran-Iraq conflict had reached a fever pitch.
Roger W. Robinson, Jr., former chief economist at the National Security Council, who played a pivotal role in the development and implementation of this policy noted, "Speculators who had hoped to capitalize on international uncertainties and anxieties concerning the implications of expanded attacks against tankers and oil facilities had their plans dashed when this proactive and coordinated alliance policy on early oil stock releases became known publicly."
The Iranian revolution of 1979 created a modest shortfall in oil deliveries of approximately one million barrels per day (mbd). This shortfall could have been handled with relative ease but for the fact that both government and private oil inventories were at all-time lows. As a consequence, the speculative panic over the implications for the oil market prompted simultaneous stock-building by Western governments and companies. The effect was a three-fold increase in oil prices over a one year period from roughly $12 per barrel to $36 per barrel.
The Reagan Administration was determined that this debilitating development for the world economy of 1979 not be repeated under its leadership. Accordingly, the National Security Council staff took the lead in late 1983 in formulating a three-pronged strategy, the components of which were:
- the early and coordinated release of oil reserves that had been stockpiled after 1979;
- the further, gradual build-up of oil stocks; and
- the cessation of arms sales to the belligerents.
Following secret negotiations with allied governments aimed at securing a firm and coordinated approach to early stock releases, the fact that such an alliance policy had been agreed was disclosed. Not only were the potentially harmful activities of speculators diffused, but more importantly, this pre-crisis planning by the Reagan Administration — strongly endorsed by then-Vice President George Bush — bought time to forge appropriate energy, political and military options.
The good news is that in today’s crisis, both government and private oil inventories are relatively substantial. For example, the U.S. Strategic Petroleum Reserve has the ability to supply total U.S. oil import needs for approximately 80 days. Of greater relevance, the United States could release approximately three mbd onto world oil markets, Japan about one mbd and Germany roughly one mbd.
In a worse case scenario, as much as four mbd could be withheld from the marketplace as a result of the Iraq-Kuwaiti crisis. Even this highly unlikely shortfall could be covered by the five mbd represented by the combined release of U.S., Japanese, and German stocks — not to mention the contribution Britain, France, Italy and other European nations might make to this effort to stabilize oil prices.
The bad news is that the United States imports roughly twice as much oil as it did in 1984 (about eight vs. four mbd, respectively). Worse still, the U.S. now depends upon Middle East oil for approximately 50 percent of its import requirements — as opposed to roughly 30 percent in 1984.
Frank J. Gaffney, Jr., the Center’s director, observed, "The Iraqi invasion shows that a ‘throw-up-your-hands’ approach to inordinate U.S. dependency on volatile Middle Eastern oil supplies is a strategic mistake. There is a clear need to reduce this dependency markedly by developing alternative, secure sources even if doing so requires paying a marginally higher price — what might be termed a ‘security premium.’"
Gaffney added, "It is incumbent on the Bush Administration to utilize the 30 to 60 day cushion provided by the threat or fact of allied oil stock releases to deal with the underlying problem — the military and economic menace arising from Saddam Hussein’s megalomania."
The Center believes that the West has now been put on notice: Returning to the status quo ante is not enough; the vital Persian Gulf region and indeed the larger international peace will not be safe as long as Saddam Hussein remains in power. Accordingly, U.S. policy — and that of all civilized nations — should be aimed at securing the downfall of the present Iraqi regime using the full array of diplomatic, economic and, if necessary, military measures at the West’s disposal.