Jet-A supplies secure, even in event of war

 - October 12, 2007, 10:20 AM

Energy companies’ experience of the early-1990s Gulf War suggests that any sudden increase in oil prices owing to a new Iraq conflict might be brief, since the market has become much more responsive to demand. However, current oil supplies are plentiful, according to a petroleum industry senior executive. Lower fuel consumption by airlines during the continuing recession and government oil stockpiling in anticipation of war should mean reasonable availability of jet-A.

“We might expect a sharp upward price spike, which would quickly dissipate [in any new war] once the oil-supply chain from other Arabian Gulf states had been secured,” said Paul Skinner, group managing director of Royal Dutch/ Shell. Nevertheless, early last month he warned delegates at The Economist global airlines conference in London that if production capacity was disrupted, higher prices might continue. “If there were a longer conflict resulting in more damage to oil facilities, this would, of course, exacerbate and prolong upward price pressures.”

Acknowledging that such trends were “uncertain and difficult to predict,” Skinner is confident about supplies: “The commitment of [the Organization of Petroleum Exporting Countries] to meet an oil shortfall by bringing additional crude [oil] to market, coupled with the potential for release from strategic reserves, could allow us to deal with even an extended period of supply disruption. The oil industry today has significantly more flexibility to respond using supply and trading capabilities than at the time of the [previous] Gulf War.”

Nevertheless, he recognized additional global factors affecting oil prices: “Continuing weakness in the global economy, political unrest in Venezuela [a major oil player], the nuclear standoff in North Korea and a heightened risk of terrorism. Predicting [oil prices] with any confidence in this climate is a near- impossible task.” Skinner said volatility is the key in “a wide spectrum of possible price scenarios.”

Prices began the year at the high end of the historical range, with supplies exacerbated by Venezuelan problems and commercial stock at exceptionally low levels, which means “we are likely to see higher- than-normal price volatility as the market tries to anticipate events and then reacts–and at times overreacts–when they actually happen,” said Skinner.

OPEC is believed to have spare production capacity of some 3.5 million barrels per day (mb/d), compared with recent exports from Iraq of 1.8 mb/d (mainly to the U.S.) and 2.6 mb/d from Venezuela. “While some local shortages cannot be ruled out, there is significant supply potentially available,” but increased flexibility in the industry “would dampen upward price movements.”

Against this general background, the particular effect of renewed Middle East conflict on available supplies of jet-A does not alarm Skinner: “Substantial stocks have been accumulated to cover military transport logistics and the early requirements for any military campaign. Commercial demand remains below its September 11, 2001 level and could well decline further in a [new] conflict. Providing that crude oil continues to flow normally into the global refining system, I do not expect any widespread shortage of jet fuel,” he concluded.