Military action in Iraq raised concerns about disruption of the world's crude oil supplies. Themagnitude and duration of that disruption were key considerations in formulating a U.S. energypolicy response. But the quantity of oil supply lost during the most recent Iraq conflict has beenmuch smaller than during the 1990-1991 Gulf Crisis, which also included lost supply from Kuwait.During that conflict, oil prices rose sharply, but the price spike lasted only a few months; pricesquickly returned to pre-crisis levels. After the fall of Saddam Hussein, it appears as if this patternwas replayed, as prices briefly spiked at $40 per barrel early in the conflict and then quickly wounddown into the $20s. In recent years, Iraq has exported crude oil intermittently under U.N. Resolution 986, often called the oil-for-food program. Frequent disagreements with the United Nations have resulted inIraq's exports averaging less than 1.5 mbd during the past year, about half the country's potential.Therefore, the March 2003 disruption of Iraq's exports involved much less oil than a decade ago,so direct price and supply impacts were less severe. In addition to the relatively small loss as a result of the conflict -- which did not spread beyond Iraq -- other exporting nations increased crude supply to the world market. The Organization ofPetroleum Exporting Countries (OPEC) has most of the world's spare production capacity, equal toabout three times Iraq's average exports in 2002. During most of 2002 and all of 2003, OPECnations produced in excess of their cartel quotas, more than making up for Iraq's erratic exports andintroducing an element of stability in a market where fear of a conflict led to a "war premium" onprices. In late 2002, a now-ended oil workers strike in Venezuela shut down exports, but other OPECexporters offered sufficient supply to offset these shortfalls. Had a Persian Gulf conflict involved other producing nations or export transport routes serving them, much larger oil market impacts would have been involved. Much of the crude sold ininternational trade originates in the area; 13 million barrels per day (mbd) is shipped through theStrait of Hormuz. This is the world's most important oil choke point, (1) consisting of 2-mile wideinbound and outbound lanes -- with another 2-mile separation zone between them. The Strait isbounded by Iran to the east and Oman and the U.A.E. to the west. Looking toward its reconstruction, Iraq has great potential as an oil producer. Its current amount of proven reserves could support further oilfield development -- given the availability of investmentand technology -- to greatly expand output. And, since there has been little exploration in Iraq formany years, it is believed that greater oil resources are potentially discoverable. Were these resourcesto prove out, Iraq could potentially rival Saudi Arabia and Russia as the world's largest oil producer,upsetting the balance of power in the petroleum geopolitical arena and potentially having a profoundimpact on pricing. But this might not happen quickly: It could take up to two years of rehabilitationto boost Iraq's output to its historic high levels (2) To offer protection in the event that world oil supply had been more seriously impacted for a longer period, the United States has a range of policy options that are available for a timelyresponse. Chief among these tools is the Strategic Petroleum Reserve (SPR), which has an initialdrawdown rate of 4.3 million barrels per day (mbd). A Northeast Heating Oil Reserve (NHOR)could provide temporary relief should there be shortages of home heating oil in New England. ThePresident can also release funds from LIHEAP, the Low Income Home Energy Assistance Program. These and other short-term options are discussed in greater detail below. Because disruption andprice spikes often spur discussion about energy conservation, and diversification of energyproduction and sources for imported oil, longer-term policies, such as raising Corporate AverageFuel Economy (CAFE) standards, are also discussed in this report. The Organization of Petroleum Exporting Countries consists of 11 members -- Algeria,Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates (UAE),and Venezuela. These nations own two-thirds of the world's proven crude oil reserves and controlabout one-third of the world's current production. With world oil market stakes this big, OPEC actsas a cartel, attempting to balance supply with demand to achieve certain price levels. OPECadministers a set of crude oil production quotas for its members, attempting to maintain prices in arange of $22 to $28 per barrel established in March 2000. The OPEC quotas nominally restrict production. However, the June 2003 quota -- set at OPEC's April 24 meeting -- was 25.4 mbd (minus Iraq), while DOE estimated that the 10 membersproduced 26.4 mbd in April, having ramped up production throughout the winter to compensate forthe expected loss of Iraqi crude and a Venezuelan output shortfall. (3) As shown in Table 1, most ofOPEC's surplus capacity is located in Saudi Arabia, which has 10.0 mbd of capacity, which couldincrease to 10.5 mbd with 90 days' lead time, according to DOE's Energy InformationAdministration. Table 1. OPEC Quotas, Production, Capacity, and Surplus Output Capability (mbd) *Estimates are uncertain. Note: Rows and columns may not add due to rounding. Source: Energy Information Administration, OPEC Fact Sheet , April9, 2003,and Platts OilgramPrice Report , April 24, 2003, page 5. OPEC has met regularly trying to keep quotas at levels matching world crude demand, making frequent adjustments to reflect market realities. Table 1 shows these numbers, as well as members'maximum production capabilities. The new OPEC-10 output ceilings total 25.4 mbd, 1.8 to 2.2 mbdbelow estimated maximum production levels. The spare capacity figures measure the world's reserveproduction capability -- the ability of major producers to respond to a supply shortfall, such as thehalt of exports from Iraq or labor difficulties in Venezuela. In the United States, commercial crude inventories bottomed at the lowest levels ever observed, about 270 million barrels, in March 2003. That was less than 14 days of end-use demand, whichstands at 20.1 mbd, (4) a very high level. U.S.inventories of crude and refined products have sincerecovered. Inventories held by members of the Organization for Economic Cooperation andDevelopment (OECD), as reported in March 2003 by the International Energy Agency, are alsobelow normal levels. (5) Iraq participates in OPEC deliberations and plays a role in pricing decisions. But, because it hadbeen exporting oil under the oil-for-food program established by U.N. Resolution 986, Iraq does notparticipate in OPEC's production quota system. Sales under Resolution 986 often involved disputesthat resulted in an uneven flow of crude to world markets. Figure 1 shows that this flow fluctuated from nil to as high as 3.0 mbd; it averaged about 1.5 mbd for the year before the war. Iraq's U.N.-sanctioned exports averaged 1.7 mbd during February2003 -- supply that halted once the war began. It appears that the loss of Iraq's recent exports was made up by OPEC-10 producers, who hold most of the world's available unused production capability. Before the Iraq war, there had been an expressed willingness on OPEC's part to replace lost supplies in the event of an armed conflict. OPEC President Rilwanu Luckman was quoted in PlattsOilgram News as saying that: ... OPEC would ensure that oil markets remained adequately supplied in the event of Iraqi exports being cut off as a result of a US-led military actionagainst Baghdad. If conflict with Iraq led to the stopping of Iraqi exports, OPEC has enough sparecapacity to prevent a market shortage, he said. "If it happens only to Iraq, we have enough [capacity] to meet demand," he said, although if exports from other key Middle East producers such as SaudiArabia and Kuwait were disrupted "you're talking about a differentscenario." (6) As Luckman suggested, had military conflict impeded oil exports from neighboring countries, the dimensions of the supply shortfall would have been larger and potentially exceeded theuninvolved OPEC members' surplus production capacity. On March 17, 2003, U.N. Secretary General Annan told the Security Council that he had ordered the evacuation of all U.N. staff from Iraq and suspended the oil-for-food program. Oilexports began to dry up a few days earlier, amid rising concerns among shipowners, as well asinsurance and credit providers. But OPEC did make good on its promise; as Table 1 shows, thecartel's production increased enough to offset lost Iraqi crude. At the beginning of December 2002, Venezuela's national oil company, PVDSA, experienced its second strike of the year, virtually halting production for the next 6 weeks. The politicallyimportant firm employed many opponents of President Hugo Chavez who were displeased withgovernment measures that curtailed investment and allowed the entry of foreign oil producers to thenation's oil fields. The strike was led by a group of fired former executives and numerous PDVSAworkers who were sympathetic to the political opponents of President Chavez. PDVSA is responsible for 2.5 mbd of conventional oil production capacity -- much of which comes from very old fields -- and 1.2 mbd of refinery capacity.