No-Pinch Cutoff

Iran loses its oil clout

After Iranian oil exports were first bottled up for about two months nearly a year and a half ago, petroleum prices soared on world markets, oil-industry profits exploded, and long lines stretched out at gasoline service stations round the country. But would a second shutoff of Iranian exports prove equally disruptive? Not necessarily.

That at least is the opinion of oilmen and Government officials. Last week they were considering whether a renewed Iranian cutoff would create havoc in world markets and compel "oil sharing" among the U.S. and 19 other members of the International Energy Agency.

Under IEA rules, any country that experiences a 7% or more supply shortfall can ask the other member nations to share their own supplies so that the shortfall is held to no more than 7%. But even though some IEA nations, such as West Germany and Denmark, continue to rely on Iranian exports for as much as 10% of their petroleum supplies, sky-high prices and slumping demand for crude have already created a worldwide mini-glut of oil that would offset any loss. Because of surplus supplies, the price of oil in the so-called spot market has declined from $42 per bbl. early this year to around $33. Indeed, with storage tanks already filled to overflowing, the industrial nations could probably get by without Iranian crude for many months before any shortages or sharply higher prices began appearing in the market.

Though Iranian exports hovered at more than 5 million bbl. daily during the days of the Shah, chaos and sabotage in the oilfields have cut shipments this spring to something less than 1.5 million bbl. a day. Nevertheless, no signs of a looming squeeze on world supplies have appeared. Says a top Department of Energy official in Washington: "Given the current world demand for oil, the market could completely absorb a total loss of Iranian exports. The situation would be precarious, but it would be manageable."

One reason Iranian exports no longer count for so much is that the Khomeini regime has pushed up petroleum prices so high that customers have ceased their pay-any-price scramble for Iranian supplies. The leader of the rush last autumn was Japan, which was willing to pay as much as $40 per bbl. But by last week Japan had bulging oil stockpiles, and the country refused Iran's latest asking price of $35 per bbl. for long-term supply contracts. Iran immediately cut off all energy shipments to Japan, which now joins the U.S. and Portugal on Tehran's blacklist.

Japan was not the only customer unwilling to pay the exorbitantly high prices. In recent weeks British Petroleum and Shell have been stalling on new Iranian contracts while letting markets show that the asking price was too high. Said one IEA official: "This summer people would probably have done without Iranian crude anyway. The Iranians themselves have created their problems by trying to charge too much."

The Carter Administration was quick to trumpet the Japanese action as a victory for the President's call for allied support of sanctions against Iran. And American editorials urged the President to show his gratitude to the government of Prime Minister Masayoshi Ohira by offering to share U.S. oil with Japan, either alone or in cooperation with other IEA members. But Department of Energy officials in Washington said last week that the Japanese are unlikely to have any trouble locating alternative sources of supply. Iraq, Nigeria and Venezuela are not pumping oil at full capacity. If Iran now sells any other consuming nation the oil that it had once offered to Japan, the total amount of petroleum on the world market would remain the same, and prices should not change.

The real danger of a complete Iranian cutoff is that it could panic oil-importing nations into bidding for supplies that they do not really need, which would send the cost of petroleum rocketing all over again. The 13-nation OPEC cartel has been able to boost its prices from $12.70 per bbl. to more than $26 since December 1978 only because the Iranian shutoff triggered frantic and counterproductive hoarding by nations and oil companies.

With OPEC ministers scheduled to gather in June in Algeria to discuss price and supply questions for the rest of 1980, IEA members met last week in Paris to discuss national policies that might avoid a replay of the oil scurry of 1979.

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