Perspective on Imports Policies
Authors: Lichtblau John H. 
Published: December 2007

PITFALLS OF OIL INDUSTRY FORECASTS PITFALLS OF OIL INDUSTRY FORECASTS
It is generally assumed that the most risky aspect of the oil industry is wildcatting. However, based on long and at times painful experience, I would say that forecasting in the oil industry is every bit as risky-at least for the forecaster. Even the most sophisticated crystal ball has its dark areas that no computer, human or electronic, can penetrate. Perhaps the darkest such area in our industry is the Perhaps the darkest such area in our industry is the rapidly growing interaction between economics and politics. For while homo economicus may be a politics. For while homo economicus may be a rational being with reasonably predictable reactions to a given set of conditions, man as a political animal is notoriously unpredictable. Hence, the often remarkable difference between foresight and hindsight on the oil industry. I could cite a few sad examples from personal experience. But that would be literally self defeating. I propose therefore to zero in on other forecasts to make my points.

CABINET TASK FORCE REPORT ON OIL IMPORTS
My target for today is the Report of the Cabinet Task Force On Oil Imports that was issued last year, and that dominated all discussions on the subject of oil imports throughout 1970. As the most comprehensive report on the subject, it is likely to continue to exert considerable influence on the industry for some time. Thus, an analysis of the report in the light of the events since its publication is not just an academic exercise R provides a perspective of the events affecting U. S. oil imports perspective of the events affecting U. S. oil imports over the last 18 months. More importantly, it permits a comparison of the assumptions in the report against the realities of subsequent trends and events.

TANKER RATES AND CONSTRUCTION COSTS
One factor to consider is the sharp increase in the freight rate of oil imported by tanker, particularly the spot rate that has rendered Eastern particularly the spot rate that has rendered Eastern Hemisphere crude oil imports in tankers charted under this rate more costly than domestic crude oil at the U. S. East Coast during the latter part of last year. The increase was dramatic and had a major impact on both domestic production and the pattern of imports. But it has all the appearance of a temporary aberration. Freight rates have recently started to decline, and according to my own imperfect crystal ball, by next year they will probably have returned to approximately the level that prevailed when the Task Force Report was published.
However the cost of tanker construction has risen sharply in the past 18 months as has the cost of constructing docking and unloading facilities for tankers of 150,000 tons and over that are expected to carry most oil in international trade by 1980. The Task Force's estimate (based on company information of a cost of 45 cents per barrel to deliver Persian Gulf crude oil to the U. S. East Coast in Persian Gulf crude oil to the U. S. East Coast in 1980 seems too low in the light of today's cost figures, particularly if the additional cost of the facilities required for the very large carriers (VLC's) is taken into account. In fact the Task Force's 1969 actual figure of 73 cents for Persian Gulf to Philadelphia shipments may not be very much above Philadelphia shipments may not be very much above the level attained by 1980. Time charters for VLC's for the post-1975 period have recently been made at prices at and above that level. Thus, the coming of prices at and above that level. Thus, the coming of age of the VLC's is likely to change the economics of U. S. oil imports considerably less by 1980 than has been assumed by the Task Force.

THE POSITION OF OPEC
A more important development not foreseen by the Task Force has been the effective cartelization of the Organization of Petroleum Exporting Countries (OPEC). The Task Force did not assume the inability of the major producing countries to exert direct control on prices quite as categorically as did the Report by Charles River Associates that the Task Force had commissioned. That Report stated,". . . but as more nations become important petroleum producers, it will become increasingly difficult for all producers to agree on an enforceable common price policy. If this happens, competition will drive prices down toward the vicinity of marginal costs.
The difficulties of cooperation among OPEC countries are increased by the actual and potential animosities that exist among the member nations.
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