	Overview

Military action in Iraq raised concerns about disruption of the world's crude oil supplies. After the fall of Saddam Hussein, it appears as if this patternwas replayed, as prices briefly spiked at $40 per barrel early in the conflict and then quickly wounddown into the $20s. Frequent disagreements with the United Nations have resulted inIraq's exports averaging less than 1.5 mbd during the past year, about half the country's potential.Therefore, the March 2003 disruption of Iraq's exports involved much less oil than a decade ago,so direct price and supply impacts were less severe. In addition to the relatively small loss as a result of the conflict -- which did not spread beyond Iraq -- other exporting nations increased crude supply to the world market. The Organization ofPetroleum Exporting Countries (OPEC) has most of the world's spare production capacity, equal toabout three times Iraq's average exports in 2002. Had a Persian Gulf conflict involved other producing nations or export transport routes serving them, much larger oil market impacts would have been involved. But this might not happen quickly: It could take up to two years of rehabilitationto boost Iraq's output to its historic high levels (2)
To offer protection in the event that world oil supply had been more seriously impacted for a longer period, the United States has a range of policy options that are available for a timelyresponse. Chief among these tools is the Strategic Petroleum Reserve (SPR), which has an initialdrawdown rate of 4.3 million barrels per day (mbd). A Northeast Heating Oil Reserve (NHOR)could provide temporary relief should there be shortages of home heating oil in New England. ThePresident can also release funds from LIHEAP, the Low Income Home Energy Assistance Program. Because disruption andprice spikes often spur discussion about energy conservation, and diversification of energyproduction and sources for imported oil, longer-term policies, such as raising Corporate AverageFuel Economy (CAFE) standards, are also discussed in this report. OPECadministers a set of crude oil production quotas for its members, attempting to maintain prices in arange of $22 to $28 per barrel established in March 2000. Figure 7 below shows gasoline prices as well as crude oil prices during the recent past. Were this to take place, Iraq might become a majordeterminant of world oil prices. Lost Iraqi supplies were largely made up by other exporters. However, had aprolonged shortfall to world oil markets occurred, the option with the greatest potential in the shortterm would almost certainly have been the Strategic Petroleum Reserve (SPR), which has an initialdrawdown rate of 4.3 million barrels per day. When OPEC adjusted production quotas of member nations in March 1999, crude supply was reduced by roughly 2 mbd from prior levels of production. International Energy Agency. High prices, it can be argued,will encourage additional domestic production, but the course of oil prices over time is difficult topredict.
Military action in Iraq disrupted the world's crude oil supplies, but sufficient world supply was available during the disruption to keep the resulting price spikes within tolerable levels. With theelimination of the regime of Saddam Hussein, the resumption of Iraqi oil exports seems near, worldoil prices have fallen, and adequate supplies from other exporters are available to satisfy near-termdemand, which is entering the seasonally slack spring period.
Until they halted in mid-March 2003, Iraq's petroleum exports recently averaged about 1.5 million barrels per day (mbd), significantly less than the 3.7 mbd lost to world markets during theGulf crisis in 1991. Consequently, price and supply impacts of the recent interruption were lesssevere. And other exporting nations were able and willing to increase crude oil supply during thedisruption. The Organization of Petroleum Exporting Countries (OPEC) -- holder of nearly all ofthe world's spare production capacity (equal to about three times Iraq's exports in 2002) -- filledthe supply gap.
OPEC administers a set of production quotas for its members, attempting to maintain prices in a range of $22 to $28 per barrel. Production by the OPEC-10 (excluding Iraq) increased as quotaswere raised in the face of prices exceeding $30 (they briefly peaked at $40). The high prices resultedfrom added factors outside the Persian Gulf, including an oil workers strike in Venezuela. WithVenezuela producing at about half its pre-strike level and Iraq's exports halted, other OPECproducers were able to keep world production constant. However, little reserve margin remains andprices have been slow to fall into OPEC's target price range.
This relatively benign oil disruption scenario took place because the conflict in Iraq did not impact other Persian Gulf producers. Had the conflict involved other producing nations or transportroutes serving them, much larger oil market impacts would have resulted. With only Iraqiproduction affected, crude oil prices spiked briefly above $30 per barrel, and average U.S. gasolineprices rose by 31 cents per gallon. A wider disruption could have caused price spikes as great as $53per barrel and of indefinite duration.
In case of a major loss of crude oil to world markets, the United States has a range of policy options that are available for a timely response. Chief among these is the Strategic PetroleumReserve (SPR), which has an initial drawdown rate of 4.3 mbd. A Northeast Heating Oil Reserve(NHOR) could provide temporary relief should there be shortages of home heating oil in NewEngland. The President can also release funds from LIHEAP, the Low Income Home EnergyAssistance Program. The United States is also a member of the International Energy Agency (IEA),which can orchestrate a coordinated world drawdown of oil stocks. Oil disruptions often spurdiscussion as well about energy conservation measures, increased domestic production, and otherlong-term policy options.
This report will be updated as events warrant.