Shortage of a Different Grade : U.S. Oil Supplies May Be Tight, but Sources Are Diverse

By PATRICK LEE

May 14, 1996 12 AM PT

TIMES STAFF WRITER

For a nation that once worried about running out of oil, the United States nowadays keeps very little of it lying around.

Oil companies are keeping only the minimal amount of oil on hand to meet immediate refinery needs. Like auto makers and other U.S. industries eager to cut costs and reduce capital tied up in supply, they are using “just in time” inventory management.

But as Californians and other Americans have learned in recent weeks, the effect of lean supplies on the price of a commodity such as oil can be much more immediate than they are on, say, the price of cars.

When supplies got a little too lean--a result of refinery accidents and other factors--against a backdrop of inventories that were lower to begin with--retail prices of gasoline in California soared to their highest levels in years.

The experience has some people worrying anew about the adequacy of U.S. oil supplies, particularly at a time when reliance on oil from other countries--after declining since the energy shocks of the 1970s--has returned with a vengeance.

Americans today are more reliant than ever on imported crude as demand has grown and our own oil fields have withered. About half the oil consumed in this country comes from foreign sources, up from a low of about 31.5% in 1985.

Does this leave the country more vulnerable to price spikes and supply disruptions?

“This will increase price volatility on the upside and downside,” said Philip K. Verleger Jr., a petroleum economist with Charles River Associates in Washington. “If something goes wrong, then prices go through the ceiling.”

But there is a big difference from the past. More of the nation’s oil imports are coming from countries other than the Persian Gulf members of the once-imperial cartel, the Organization of Petroleum Exporting Countries.

And more of our imports are coming from close to home--especially Canada, Mexico, Venezuela and Colombia.

“Crude from nearby suppliers--those from Central and South America, from Europe and West Africa--have taken precedence over long-haul supplies,” John H. Lichtblau, chairman of the Petroleum Industry Research Foundation, said in testimony before the Senate last week.

The increased diversity of the foreign oil supplies means the nation is less vulnerable to supply disruptions such as those of the 1970s, which were caused by political upheavals in the Middle East.

Meanwhile, the worldwide pool of recoverable oil is thought to be growing as the Far East, and particularly Russia, come under the seismic gaze of Western technology.

“I have always believed that there’s an exaggerated attention paid to the national security aspects of oil,” said John E. Treat, an industry economist with Booz, Allen & Hamilton in San Francisco. “I happen to believe that interdependence tends to be a good thing in commercial relations.”

Whatever the consequences, this interdependence is apparently here to stay: Americans show little sign of easing their thirst for oil, yet the fact is that U.S. oil production has been declining steadily for a decade as the nation’s oil fields mature.

In the U.S., production of crude oil has fallen 27% from its 1986 peak, to about 6.5 million barrels a day last year, according to the Energy Department. The decline has come as the fall in oil prices made it less rewarding to develop domestic fields.

Recently, new technologies have lowered the cost of producing oil from these mature fields and enabled some oil companies to get oil from previously impossible areas.

In Alaska, for example, sophisticated new oil-recovery techniques and new drilling equipment are extending the life of the massive Prudhoe Bay and Kuparuk oil fields operated by Atlantic Richfield Co. on the North Slope.

Still, these measures have limited potential, and imports have grown sharply. In 1985, crude oil imports stood at just 3.2 million barrels a day; in 1995, they more than doubled to 7.24 million barrels a day, the government says--higher than at the worst of the 1970s oil crises.

But the diversification in America’s sources of imported oil has been striking.

In 1990, the Arab OPEC countries accounted for 1.86 million barrels a day of imports, or one-third. In 1995, that number had fallen to 1.5 million barrels, or 21% of imports, the Energy Department reported.

Some reasons: Libyan oil imports ended in 1986 as the result of a U.S. embargo. Similarly, the U.N. embargo on Iraqi oil cut off that supply in late 1990, following the invasion of Kuwait. Imports from Saudi Arabia have filled some, but not all, of the gap left by those two nations.

A more important factor has been the stepped-up oil production from outside the Middle East, especially in Latin America. In 1990, imports from Canada, Venezuela, Mexico and Colombia totaled 2.14 million barrels a day, or 36% of total U.S. imports. In 1995, the amount was 3.43 million barrels a day, or 47% of total imports.

The “just in time” inventory management of oil companies favors these sources because of the shorter travel time. While it takes 40 days for oil tankers to cross the Atlantic from the Persian Gulf, it takes only three days from Mexico and five from Venezuela.

Refiners who once held inventories of between 16 and 40 days’ worth now hold stocks equal to only three to five days’ supply, the Energy Department reported. The proximity also cuts the cost of the crude oil by 26 to 59 cents a barrel in lower transportation costs.

There are also closer ties between U.S. oil companies and such South American producers as Venezuela and Argentina, which have liberalized their rules for investment by foreign companies.

“One by one, those governments have thrown open the doors,” industry economist Treat said.

Meanwhile, oil exploration has been stepped up dramatically in China, Vietnam, Cambodia and other Asian countries, as well as in the nations of the former Soviet Union. Russia and other countries are rich in oil, but the money and technology to retrieve it are only now becoming available.

For example, Chevron Corp. has invested $700 million in the last three years to develop the Tengiz oil field in Kazakhstan, a field believed to hold as much as 9 billion barrels of recoverable oil--an amount comparable to the Prudhoe Bay field in Alaska.

All of this has some observers questioning how relevant OPEC is in this new world order of crude oil. But don’t count the sheiks out yet, said Cheryl Trench, an analyst with the Petroleum Industry Research Foundation. The Middle East still has the most oil.

“OPEC is still the organization where excess [oil production] capacity exists,” she said. “The decision to continue with a [production] quota system . . . and for the Saudis to adhere to their quotas . . . are part of what keeps the price of oil above the cost of production. OPEC still provides a floor to the market.”

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Higher Imports, but Not From OPEC

The United States’ reliance on crude oil from other countries is at an all-time high as demand grows and the U.S. oil patch dries up. But the increased shipments have come mainly from producers closer to home, especially Canada, Mexico and OPEC member Venezuela rather than the Middle East. Average daily crude oil imports by the United States, in millions of barrels:

OPEC Imports (1995): 3.6

Non-OPEC imports (1995): 3.6

Total imports (1995): 7.2

Source: U.S. Energy Information Administration

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Pump Watch

Retail prices in California for self-serve regular unleaded gasoline edged lower Monday. Daily price per gallon:

Monday: $1.538

Source: Energy Information Administration

* PUMP WATCH

Retail prices for self-serve regular unleaded gasoline edge lower. D14

* GAS TAX