Loss of Iraqi Oil Could Have Big Effect on State

A Mideast war would be likely to disrupt oil markets nationwide, but the shock could be bigger in California, where more than 8% of the state’s already tight oil supplies come from Iraq -- twice the percentage of the U.S. as a whole.

In fact, Iraq is the biggest single source of foreign oil in California, accounting for about 28% of imports. That’s partly because the type of “sour” crude it produces is a good match for refineries owned by ChevronTexaco Corp., the state’s No. 1 buyer of Iraqi oil.

Experts say that if Iraqi oil stopped flowing into the market, other countries would step up their petroleum production to fill the void. But even though that would help California refineries find replacement supplies, analysts add, it probably wouldn’t protect motorists here from seeing at least some price increases at the gas pump.

“Refineries here in California are pretty much running flat-out,” said David Hackett, president of Stillwater Associates, a consulting firm that has done studies for the state Energy Commission. “They don’t have any makeup capability in case there is some kind of supply shortfall.”

Philip Verleger, a senior fellow at the Council on Foreign Relations, agrees that the West Coast is “uniquely exposed.”

“If we go to war now, we’ll be going to war when inventories are at their lowest level in 27 years,” Verleger said. “I think there’s a problem.”

California doesn’t have a pipeline giving it access to the U.S. strategic petroleum reserves in Texas, he noted.

So even if reserves are released, he said, shipments to California probably would be delayed.

“Until that oil got here, there could be some panic buying,” he said.

Refineries may be able to find replacement crude without delay, but the added logistical burden probably would raise prices for consumers, said Mark Mahoney, markets editor at Oil Price Information Service, a company that tracks oil and gasoline prices.

“The oil companies are going to have to go out on the open market and find other sellers of crude,” Mahoney said. “And with war in the Middle East, you’re going to have problems with cargoes and tankers getting in and out of ports.”

Analysts were reluctant to estimate how much California gas prices might rise with a war in Iraq, partly because predicting prices in a highly volatile market is difficult and partly because other conditions -- such as refinery shutdowns -- can factor in. The extent of the disruption also would depend on the length of a military conflict.

Not everyone agrees that California’s disproportionate reliance on Iraqi oil would translate to bigger gasoline price jumps than those experienced by the rest of the country.

John Kingston, director of global oil at Platts, the energy market information division of McGraw-Hill Cos., believes that oil markets spread the effects of surpluses and shortages evenly across the globe, like water leveling in a pool.

“There’s a ripple effect, but it affects everyone the same,” Kingston said. “California will not suffer more than the rest of the world.”

Still, a host of special circumstances in California keep oil supplies ahead of demand by the thinnest of margins. The state’s oil companies, for example, cannot rely on outside sources for gasoline because California’s strict emission standards prescribe a fuel formula like no other. And that difference could be exacerbated by the state’s replacement of the gasoline additive MTBE with ethanol, a transition already underway.

As a result of these and other factors, the state’s gasoline prices already are well above the national average. On Friday, the average retail price of regular unleaded gasoline jumped to $1.747 a gallon -- 19 cents above the national average of $1.557, according to figures from the Automobile Club of Southern California. Last year at this time, Californians were paying an average of $1.29 a gallon, although prices are still below the 2001 peak of $2.022.

Much of the recent increase has been attributed to a crippling strike by oil workers and others in Venezuela, which cut off that country’s exports in late 2002 and has pinched worldwide supplies of crude oil.

A disruption of Iraqi supplies would be a new headache, one that would hit San Ramon, Calif.-based ChevronTexaco hardest of any oil companies serving the state.

The most recent figures from the U.S. Customs Service show ChevronTexaco imported 27.5 million of the 33 million gallons of Iraqi crude imported into California in the first 11 months of 2002.

ChevronTexaco, which does not have access to oil from Alaska’s North Slope, “is buying the Iraqi crude because it fits their refineries and the price is attractive to them,” said Mikkal E. Herberg, a professor of foreign relations at UC San Diego.

“They’ll have to scramble around and find substitute supplies, and that will bid up the price.”

Oil companies typically tailor their refineries to extract the most gasoline and other oil byproducts out of certain grades of crude oil, measured by viscosity and the level of sulfur in the crude. Many of California’s refineries work most efficiently with crude from Alaska, but ChevronTexaco’s plants are partial to the high-sulfur, or sour, Iraqi crude, Herberg and others said.

ChevronTexaco officials would not discuss the source of their oil imports -- or their contingency plans in the event of a U.S. attack on Iraq.

The subject is clearly a touchy one; no oil company wants to appear to be in league with Iraqi strongman Saddam Hussein. But ChevronTexaco and other oil companies do not deal directly with Iraq and are not violating any sanctions or embargoes.

They import Iraqi crude as part of a United Nations program that allows Iraq to export oil and use the proceeds to buy food and humanitarian supplies. Typically, a cadre of U.N.-approved, non-U.S. firms purchase the oil directly from Baghdad and then resell it to U.S. refineries.

According to the state Energy Commission, California imported about 54.9 million barrels of crude oil from Iraq in 2001, the last full year of data available. The second-largest foreign supplier was Saudi Arabia, with 42.5 million barrels, equal to 6.5% of the state’s total supply that year.

Although California’s dependence on foreign sources of oil is growing every year and now approaches one out of every three barrels of crude, the state import needs are relatively minor compared with other states. That’s because of California’s own bountiful oil fields. In 2001, they provided nearly half the crude consumed by state residents, while an additional 21% came from shipments from Alaska.

John Felmy, chief economist at the American Petroleum Institute, acknowledged that “it’s probably a bit of a surprise” for Californians to discover how much oil the state imports from Iraq.

But even if pump prices rise a bit, “there won’t be any gasoline lines,” he added.

“The oil market is a tremendous arena in terms of being able to purchase and move oil around the world,” Felmy said.