Created: 9/13/1985

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13 September IMS


John N. Poladaatcr. DSN Deputy to the Praela'eat for RatloaalAffairs

Tbc loaoTiMr Htehaal I. Ariaeotl

Uader af Stat* for Political Affalra

Bonoriblt Fred C. t la

Oadar Secretary af Dafaaaa for Policy

Tha lODonblt Richard L. Araltage Aaalataat facrotary of Dafaaaa

for Xateraatlosal Sacarlty Affaire

VADH Arthur 8. Koraau. Jr., DSN Aaalataat to Che Chalraaa, Joint Chlafa of Staff



Boa KcDaatal

Security Council

Iapaet of a Paralaa Culf Oil Cutoff

Tba ISC Staff haacirculate tha attaeaaa! papar

prior ca Meaa'ay'a CPPC aaetlag.

Catae Daputy Dlraetor for Xatalllgaaei

Iaaact of

Paralaa Culf Oil Cutoff




Impact etaian Gulf Oil Cutoff


With free World surplus capacity now running atalf of which la in Saudimarket could easilyoaa of eiporta frest Iran, Iraq and Kuwait. rioua problem would arise if Saudi exports vara also cut or if all oil shipping in the Peraian Gulf ware stopped* Although our Imports from Persian Gulf countries are raall, the United Ststesarge stake in the continued flow of oil trem tbe region since we could not insulate ourselvesajor oil disruption. The United Stataa would share the burden of any net supply ahortfall aa oil pricea rose and oil coeipaniea diverted supplies in response to market pressures. Ia the eventajor disruption, oil supplies sight be allocated based on the International energy Agency (ISA) sharing agreement which could mean significant diversion^ of oil treat tbe OS market to Western Europe and Japan.


Impactersian Cult Oil Cutoff

Current Situation

The current combination of substantial excess production capacity and weak demand provides considerable protection against an oil supply cutoff. Current available surplus capacity that couldupply cutback stands at about* but onlyf that surplus is outside the Persian Cult.

Weak market conditions have caused oil companies to reduce oil stocks. We estimate non-Communist oil stocks at mid-year stood atillion barrels or some BS days of supply.

o Host of current stocks represent minimum operating

requirements needed to ensure smooth functioning of the distribution system, compulsory stocks that companies maintain to meet government regulations and government owned stocks, wo estimate that useable commercial inventories total onlyillion barrelsays of consumption. This stock cushion has declined fromays in thend now provides only small hedge against oil supply cutoffs.

o Sizeable government-owned stocks are located only 6 millionnd Westillion barrels). InIEA members agreed to coordinate stocktake "complementarydemandshare the burden of any economic dislocationsoil disruptions.

Western Dependence on Persian Gulf Oil

Persian Gulf countries are now exporting. accounting for about one-fifth of total non-Communist oil supplies, of this,low through the Strait of Ho mux with the remainder shipped via pipelines from Saudi Arabia and Iraq to the Mediterranean and the Red Sea. Inestern Europe, Japan, and tho united States relied on the region tor aboutercent,ercent,ercent, respectively, of their total oil imports. Although Western Europe's reliance on the region has declined in recent years, several countries remain heavily dependant on Persian Gulf oil. Italy, Greece, Portugal, and Turkey received fromoercent of their oil supplies from the region during first

Vulnerability of Persian Gulf il it ie_s

Although crude oil is now beginning to flow from Iraq through the spur to Saudi Arabia's East-Wsst pipeline, the well


key components more than three

defended pumpstations Along the Iraq-Turkey pipeline remain the most critical chokepoints for Iranian attack followed by the crude processing plants at Kirkuk which serve Iraq's northern oilfields. elsewhere in the Gulf* the nost critical and vulnerable oil targets are the export-Loading facilities. Saudi Arabia's facilities at ftas Tanura and Ju'aymah are vulnerable to both air attack and cent-undo raids, as are Kuwait's Hina al Ahmadi onshore export terminal and Sea Island, of these facilities were damaged, it could take

months to reopen them even partially: repairing major structural damage could takeear.

Impact of oil Disruptions


impactisruption of Persian Culf oil exports in tens would depend mainly on its severity and duration, ty of supplies from other producers and the use of petroleum stockpiles. The oil market could easilyoss of Iranian oil exports. Surplus available capacity is more thanto offset the loss of Iranian exports, currently averaging about. Spot prices, however, could begin to rise if buyersurther spread of the conf1ict.


intact, adequate to meet winter requirements. On the other hand, the loss of Saudi Persian Gulf export potential alone would reduce capacity by as much.

available export

If Khark island were shut down and Tehran retaliated by sever ing the Iraqi pipeline and knock ing out Kuwaitiotal off export capacity would be lost. Although other countries could replace these lost supplies by raising output, this would eliminate much of the surplus capacity available to the market and leave oil importing countriesigh risk situation. The uncertainties surrounding the duration of the disruption and the fearuch more serious shortage resultingutoff of Saudi exports would cause spot prices to rise. As long as Saudi export capabilities remain howover, oil supplies should be

flows Pers

productive capacity would be

Denial of

orst case scenario involving the interuption ofhrough the Iraq-Turkey pipeline and the cutoff of all lan Gulf oil exports,n Persian Gulf

Lost to the market.

access to Persian Gulf oil suppliesrolonged period would

et supply shortfall, almost double the

size of the shortage caused by the Iranian Revolution

Under these circumstances, prices would rise sharply and the

economic recovery would be interrupted. We estimate oil prices

could rise byer barrel foret

supply shortfall. Furthermore, under this worst case scenario

the real GNP growth rate could be reduced by upercentage points.

implications for the United States

The United Statesarge stake in the continued flow oil from the Persian Gulf in spite of the fact that US oil imports from the Gulf are less. Although the United States could draw on non-Gulf surplus capacity tooss in Persian Gulf imports, it probably would be required to share the burden of any OECD net supply shortfall either through informal company redistribution or the IEA allocation system. The IEA sharing plan can be triggered when the shortfallember country or the groupinimumercent.

Effective deployment of government-owned stocks under the terms of the IEA agreement would play an important role in offsetting any future oil supply disruption. The key players in any coordinated strategic stock drawdown would be the United States, Japan, and West Germany. The major problem would be the design and implementationrogram believed to be effective and equitable. In addition to demand restraint measures, countries withouttockpiles could share the burdenisruption by augmenting supplieselaxation of mandatory commercial stockpile requirements.


Non-CooiiBunUt Oil Supplies* First5


Persian Gulfi

Saudi Arabia





Non-Persian Culf:





Total Supplyi

Includes NGLs. Totals Bay not add due to rounding.

Original document.

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