Effects of an oil supply reduction

Nov 13, 2001 01:00 AM

by Susan Lee

What would happen in the unlikely event Saudi Arabian oil was cut off? In the long run, not much, say economists. However, in the short run it would be economically uncomfortable to the United States and other oil-importing countries.
Saudis' output of 7.5 mm bpd represents 10 % of the world supply. In the short term, energy economists say that if that supply was cut off, the world oil price might rise to $ 55 a barrel. The short-term price increases would reduce Gross Domestic Product in oil consuming countries by 3 % to 4 % in the first year.

But due to national reserves and unused production capacity, the supply could be increased quickly in the short term, and in the longer term higher prices would encourage increased production. In the short term, US oil production could increase 300,000 bpd, and in the longer term by up to 1 mm.
Other Middle East countries have the spare capacity to increase production by 2.5 mm bpd. Another million barrels might come from Mexico, Venezuela and the North Sea.
And the strategic oil stocks of Japan, the US and Germany hold 1.2 bn barrels, which if released at a rate of 5 mm bpd would last six to eight months. Thus the entire Saudi supply could be replaced from other sources.

In any event, say economists, the economic shock of higher petroleum prices would be lessened in the US because oil use relative to GDP has dropped almost 45 % since 1979 and the real, or inflation-adjusted, price of oil has fallen by one third. This means money spent on oil is about 40 % of what it was relative to GDP 20 years ago.

Source: Susan Lee, "We can live without Saudi oil," The Dismal Science, Wall Street Journal
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