Petroleum availability in disrupted markets

Econometric and linear programming models have been used to evaluate petroleum availability during scenarios representing severe disruptions of crude oil from the Persian Gulf region. The associated effects of the Strategic Petroleum Reserve, International Ener- gy Agency sharing agreements, increased fuel demand required to mobil- ize US military forces, and other impor- tant issues are considered. Results for the different scenarios in 1990 are presented for world crude oil demand, crude oil supplies to the USA and US output of refined product categories.

The authors are with the Energy Division, Oak Ridge National Laboratory, Oak Ridge, TN 37831-6205, USA.

The authors gratefully acknowledge spon- sorship through the Mobility Fuels Tech- nology Program of the US Navy Energy and Natural Resources Technolbgy sion, Office of Naval Research.

Divi-

‘Energy Information Administration, Oil Market Simulation Model Documentation Reoort. DOE/El/l 9656-2, US Department of Energy, Washington, DC, May’1985. *A.F. Turhollow. T.R. Curlee and SDas. Documentation bf the Petroleum Allocation (PAL) Mode/, Oak Ridge National Labora- ton/. Oak Ridoe. TN, March 1987. 3Energy Information Administration, Annual Energy Outlook 7983, DOE/EIA- 0383(83), US Department of Energy, Washington, DC, May 1984.

Petroleum availability in disrupted markets

S. Das, R. Lee, R.M. Davis and G.R. Hadder

An analytical system based on a series of US Department of Energy (DOE) models has been used to develop global petroleum market forecasts for business as usual (BAU) and for a number of supply disruption scenarios in the year 1990. This paper discusses the application of two models:

1. The econometric Oil Market Simulation (OMS) model’ determines the price at which global supply and demand for oil are in balance.

2. The Petroleum Allocation (PAL) model2 is a linear program that estimates global petroleum movements for different market scenarios. In PAL, crude oils are described in terms of their source regions and by their potential to yield refined products. The products are defined by the aggregate categories of gasoline, jet fuel, distillate fuel, residual fuel and other refined products.

Scenario descriptions

All disruptions were assumed to include a major reduction in Persian Gulf crude oil production. Approximately two-thirds of the world’s proven oil reserves are in the Persian Gulf. Given the current world shut in capacity of eight to ten million barrels per day (mmbd), it is likely that fuel supply sources in the world are adequate for most contingencies except for a major disruption of crude oil from the Persian Gulf.

The scenarios were intended to represent possible, though not necessarily likely, events. The disruptions were limited to crude oil production in the Persian Gulf (and to Venezuelan exports of both crude and products), and did not include curtailment of refinery operations or exports of refined products from the Persian Gulf. Thus, implicitly, the scenarios do not represent major naval actions in the Persian Gulf since those would probably affect the flow of products as well as crude oil. Rather, the scenarios represent either major economic or political actions, or military actions targeted on crude oil production or transport facilities.

Business as usual scenario

The 1990 BAU scenario was based on the most recently documented DOE BAU energy scenario available at the beginning of the study.3

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Disruption scenario 1 (Persian GulfISPRIIEA)

In disruption scenario 1, Persian Gulf crude oil production was assumed to decrease by 11 mmbd in the first quarter of 1990. Annualized, the size of the disruption was 7.7 mmbd below the projected BAU level of 14.6 mmbd in the Persian Gulf. The production loss was assumed to occur in Iran, Iraq, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates. It was also assumed that the US Strategic Petroleum Reserve (SPR) would be drawn down at 2 mmbd and that the sharing agreements of the International Energy Agency (IEA) would be in effect. The premise of the IEA sharing agreements is that by guaranteeing an equitable distribution of oil supplies among IEA members, exaggerated price hikes and damage to national economies are reduced. Each IEA country’s supply right is calculated by a formula in which its supply right is greater if its oil consumption in the previous year is greater, and if its net imports are less, relative to other IEA countries.

Disruption scenario 2 (Persian GulflSPRIIEAino Venezuelan1 mobilization demand)

In disruption scenario 2, Persian Gulf crude oil production was assumed to decrease by 11 mmbd in the first quarter of 1990, and this decrease was assumed to occur in conjunction with the loss of all Venezuelan crude and product exports (the combined Venezuelan BAU crude and product export level was 1.7 mmbd). The annualized size of this disruption was 9.0 mmbd of crude oil equivalent. It was also assumed that the SPR would be drawn down at 2 mmbd and that the IEA sharing agreements would be in effect. Additionally, it was assumed that the demand for US military fuels would increase during this disruption to three times the estimated current level of production. This increased demand was an estimate of demand under US military mobilization conditions. It was further assumed that the increase in military fuel demand would be met at the expense of civilian fuel demand.

Disruption scenario 3 {Persian GulflSPRIIEAICONUS military fuel production)

Disruption 3 was characterized by a decrease of Persian Gulf crude oil production of 11 mmbd for the first quarter of 1990, with a 2 mmbd SPR drawdown and IEA sharing. Additionally, the production of all US military fuels would be limited to refineries in the continental US (CONUS). The 1990 BAU level of US military fuel production in foreign regions was assumed to be 139 thousand barrels per day (mbd), concentrated mostly in the Persian Gulf and Asian exporting regions. In disruption 3, the reduced demand in foreign regions providing BAU US military fuels was compensated by an equivalent increase in demand in CONUS regions. The increased CONUS demand was allocated to domestic regions based on recent historical levels of military fuel production.

Disruption scenario 4 (Persian Gulflno SPRlno IEA)

Disruption 4 provides a reference with which to evaluate the impact of SPR drawdown and IEA agreements. Persian Gulf crude oil was assumed to decrease by 11 mmbd for the first quarter of 1990 without SPR drawdown or IEA sharing. A summary of the conditions under each scenario is presented in Table 1.

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l

4G.R. Hadder, S. Das, Ft. Lee and R.M. Davis, Navy Mobility Fuels Forecasting System Phase 111 Report, ORNL-6400, Oak Ridge National Laboratory, Oak Ridge, TN, August 1987. 5R. Lee, Survey of Petroleum Market 0

Forecasts: interim Report, unpublished report prepared for Navy Energy and Natural Resources Technology Division, Depart- ment of the Navy, Oak Ridge National Laboratory, Oak Ridge, TN, April 1987. l


Table 1. Descriptive matrix of the scenarios.

Scenario BAU

SPR used No IEA activated No US military mobilization No Foreign refinery sources available Yes Persian Gulf supply restraint No Supply restraint - other areas No

1

Yes Yes No Yes Yes No

2

Yes Yes Yes Yes Yes Yes

3

Yes Yes No No Yes No

4

No No No Yes Yes No

World oil demand

The OMS and PAL models were used to forecast total oil demand for the world (other than Communist areas) under the BAU and disruption scenarios.” A comparison of world oil demand under the different scenarios is shown in Figure 1. Some of the main features of the world oil demand estimates were:

Figure 1. Projected world crude oil

demand in 1990 under BAU and

disruption scenarios.

The BAU scenario was estimated to have a world oil demand of 49.3 mmbd in 1990. This corresponds closely to levels projected in other studies by DOE, the National Petroleum Council, and major oil companies. A recent survey of previous studies compiled a median world oil demand estimate of 50 mmbd.” The disruptions resulted in reduced crude oil production, higher prices, and reduced quantity demanded - for example, decreasing by 12.1% and 12.7% from the BAU level in disruptions 2 (Persian Gulf/SPR/IEA/no Venezuelan/mobilization demand) and 4 (Per- sian Gulf/no SPR/no IEA) respectively. With SPR drawdown, the decrease in world demand was not as great as without SPR drawdown. World demand in disruption 1 (with SPR) was 1.6 mmbd greater than in disruption 4 (without SPR). Total world demand was unchanged by IEA sharing. Under the

Scenarios

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IEA agreements, more crude oil was supplied to major oil consuming countries with less reliance on imports than without the agreements.

0 OPEC (Organization of Petroleum Exporting Countries) demand remained unchanged, and total demand by the IEA member countries increased at the expense of non-IEA/non-OPEC demand.

US petroleum markets

Figure 2 shows the projected crude oil supplies to refineries in the US under the BAU and disruption scenarios. The major results were:

0

0

0

All disruptions resulted in somewhat higher production of domestic crude oil and reduced imports relative to the BAU. (Once stored in the SPR, crude oil was considered to be domestic even though most was originally imported.) In disruption 4 (Persian Gulf/no SPR/no TEA), the US had more imports of crude oil than in the other three disruptions because of the unavailability of SPR crudes. Crude oil imports were 0.4 to 1.2 mmbd greater in disruption 4 than in the other disruptions. The crude oil supplied to the US during the disruptions reflects small increases in production in some areas of the world and shifts in trade flows, but no new major supply sources.

US refinery operations are illustrated in Figure 3, which identifies output in four of the major refined product categories during the scenarios. The major results on total US refined product output were:

Figure 2. Projected crude oil supplied to USA in 1990 scenarios.

In the Persian Gulf/SPR/IEA and Persian Gulf/SPR/IEA/no Venezuelan/mobilization demand disruptions, total refinery output in the US remained at about the BAU level of 14.9 mmbd. Total refinery output in the US increased to 15.1 mmbd in the

t

0 Domestic

1 1 a Foreign

3.8

Scenorlos

1

8.1 -



Figure 3. Projected refinery output in the US in 1990.

B = business as usual; 1 = Persian Gulf/ SPRllEA; 2 = Persian Gulf/.SPR/IEAho Venezuelan/mobilization demand; 3 = Persian Gulf/SPR/IEA/CONUS military fuel production; 4 = Persian Gulf/no SPR/no IEA.

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0

BI 234 BI 234 B I234 BI 234 Jet fuel DIstillate fuel

Products

Residual fuel

Persian Gulf/SPR/IEA/CONUS military fuel production disruption, the scenario in which the production of all US military fuels was limited to CONUS areas. On both volumetric and percentage bases, gasoline production was curtailed more than any other product category in the disruptions. Gasoline production declined the most in disruption 4 (Persian Gulf/no SPR/no IEA), by 14%) and the least in disruption 3 (Persian Gulf/SPFUIEA/CONUS military fuel production), by 2.7%. Similarly, US jet fuel production declined by 14% in disruption 4 and by 1.6% in disruption 3. US distillate fuel production exhibited considerable variation among the scenarios, being 11% higher in disruption 3 (Persian Gulf/SPWIEA/CONUS military fuel production) and 6.0% higher in disruption 1 (Persian Gulf/SPR/IEA); but 0.6% lower in disruption 2 (Persian Gulf/SPWIEA/no Venezuelan/mobilization demand) and 5.9% lower in disruption 4 (Persian Gulf/no SPRlno IEA). US residual fuel output was greatest in disruption 4, being 10% higher than the BAU level. This estimate occurred in conjunction with greater use of Indonesian crudes in US refineries which, according to PAL model estimates, resulted in relatively greater yields of residual fuel.

Conclusions

The types of disruption scenarios considered represent major upheavals in the world petroleum market. An 11 mmbd disruption in the Persian Gulf is large compared with recent Persian Gulf production. For example, the Persian Gulf production level in December 1986 was about 11.9 mmbd. Oil consumption did not decrease by 11 mmbd during the disruptions because consumers did not reduce their demand by the same

amount as the reduction in Persian Gulf supply. Consumer adjustments were partial and gradual in the disruption scenarios. Also, other supply sources were available, including SPR. Nevertheless, the impacts on worldwide demand for oil were substantial:

0 The Persian Gulf/SP~IEA disruption caused the quantity of worldwide demand to fall by 9.3% relative to the BAU demand of 49.3 mmbd.

l The additional elimination of Venezuelan exports combined with increased military demand in disruption 2 resulted in a larger decrease in consumption, 12.1% relative to the BAU. The increase in military fuel consumption was at the expense of the civilian sector, thus exacerbating the impact of this disruption on civilian fuel consumption.

a The necessity of refining all US military fuels in the US, as represented by the Persian Gulf/SPR/IEA/CONUS military fuel production scenario. did not alter total worldwide demand from that in the Persian Gulf/SP~IEA scenario. However, it left the civilian sector in the US more dependent on imports of refined products.

The effects of the disruptions were considered on an annualized basis for the year 1990; consequently the impacts would be more extreme during the specific 90-day period in which the height of the disruption occurred. Conversely, in future years following a disruption, the impacts would dissipate even if the disruption were to continue beyond 1990. In the long run, economies would adjust to these crude oil losses by developing new energy using technologies and finding substitutes for petroleum products refined from conventional crudes.

The drawdown of SPR crude oil and the IEA sharing agreements were effective means of reducing the negative impacts of the disruptions in the US. SPR drawdown had positive spill over effects in other countries, but the IEA provisions had negative impacts on some countries. With SPR drawdown of 2 mmbd during the Persian GulfiSPRlIEA scenario. worldwide demand and refinery yields were 1.6 mmbd greater than in the comparable Persian Gulf/no SPWno IEA scenario that had no drawdown. Thus. SPR drawdown had the impact of reducing world oil production by about 0.4 mmbd compared to the Persian Gulf/no SPR/no IEA scenario.

The IEA sharing agreements further softened the effect of disruptions on major oil consuming countries. Compared to BAU levels, regional crude oil demand in major oil consuming countries decreased less with the IEA provisions in effect compared to demand levels without the provisions. Further, the IEA provisions caused a relative increase in crude oil demand in major oil consuming countries at the expense of countries that consumed less oil. OPEC countries’ demand levels remained unchanged with SPR drawdown and IEA sharing agreements in effect compared to levels with SPR drawdown but without the IEA agreements.

The Persian Gulf disruptions caused increases in US crude oil production. The increases resulted from the higher prices that were supported by the reduced supply of foreign crudes. US crude oil supplies were at their maximuln level of 10.6 mmbd (consisting of 8.6 mmbd production and 2 mmbd SPR drawdown) during disruption 3 (Persian Gulf/SPR/IEA/CONUS military fuel production) as compared



to the BAU level of 7.8 mmbd. The reduction in Persian Gulf crude oil production, the availability of SPR crudes, and the decrease in US demand caused a reduction in US import levels.

SPR drawdown was effective in softening the immediate shock of Persian Gulf disruptions. The nature of the long-term effect would depend on the SPR reserve capacity; duration of and severity of the disruptions; development of alternative sources of crude oil; and technological, conservation, and other adjustments by end-users of fuel. The effects of the IEA sharing provisions were only marginally positive for the US.

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Petroleum availability in disrupted markets