oversight

Burden Sharing: Allied Protection of Ships in the Persian Gulf in 1987 and 1988

Published by the Government Accountability Office on 1990-09-06.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

BURDEN SHARING
Allied Protection of
Ships in the Persian
Gulf in 1987 and 1988




                 142164
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   National Security and
                   International Affairs Division

                   B-240294

                   September 6,199O

                   The Honorable Pat Schroeder
                   Chairwoman, Subcommittee on Military
                     Installations and Facilities
                   Committee on Armed Services
                   House of Representatives

                   The Honorable Andy Ireland
                   House of Representatives

                   This report is the unclassified version of our classified report. It summa-
                   rizes and updates the information provided to your staffs during our
                   April 5, 1990, briefing on the major activities of the allies and Persian
                   Gulf states to sustain open navigation in the Persian Gulf between
                   March 1987 and August 1988. Specifically, our objectives were to (1)
                   identify the countries involved in sustaining open navigation and the
                   role each played, (2) analyze the value of the contributions provided by
                   those countries, and (3) assess the potential economic impact of the dis-
                   ruption of Gulf oil imports on Gulf states and industrialized countries.

                   In late 1986, Iran began attacking ships in the Persian Gulf, In the
                   spring of 1987, the President announced that the United States would
                   reflag and escort Kuwaiti ships. In May 1987, he extended U.S. protec-
                   tion to neutral ships on a case-by-case basis, under an operation called
                   Earnest Will. The United States also called upon its allies to protect
                   shipping in the Gulf. Section 1 of this report provides a historic perspec-
                   tive of non-Gulf countries’ presence in the region.


                   Belgium, France, Italy, the Netherlands, the United Kingdom, and the
Results in Brief   United States escorted and monitored their flagged ships and helped
                   keep the Persian Gulf shipping lanes clear of mines. Only three of these
                   countries provided GAO estimates of the incremental costs they incurred
                   in these naval operations. These cost estimates ranged from $100 million
                   to $240 million,

                   E3ecausesome of the participating countries did not report cost estimates
                   for their naval operations in the Gulf, we assigned a daily cost-based
                   on U.S. operating costs- to each type of ship supporting operation Ear-
                   nest Will and derived a relative value of the contribution of each of the
                   non-Gulf countries. Based on our analysis of the types and duration of
                   naval assets provided, we believe the United States accounted for about


                   Page 1                                      GAO/NSIAD-90-282BR   The Persian Gulf
B-240294




40 percent of the assets, followed by France (34 percent), the United
Kingdom (10 percent), Italy (7 percent), and the joint Belgium/Nether-
lands operation (9 percent). Three other non-Gulf countries provided
indirect assistance. West Germany interpreted its constitution as prohib-
iting it from providing a naval presence in the Gulf. Alternatively, it
fulfilled a U.S. commitment to NATO to provide naval forces in the Medi-
terranean, thereby freeing U.S. ships for the Gulf operation. In calcu-
lating its contribution, Japan claimed credit for $500 million in loans to
Oman and Jordan, Japan also paid $9 million for a precision navigation
system installed in the Gulf. Luxembourg, which has no Navy, provided
$400,000 for the upkeep of other countries’ forces during the operation.

The Gulf states provided vital access to their ports, bases, and facilities
as well as other assistance, including fuel for U.S. ships and aircraft.
Section 2 provides details on countries’ contributions to keeping the Per-
sian Gulf open to navigation, and section 3 provides a burden sharing
analysis of these contributions.

 One objective of operation Earnest Will was to maintain the free flow of
 oil from the Persian Gulf area. During the conflict, oil disruptions did
 not occur, and Persian Gulf oil production actually increased slightly.
 Section 4 provides an overview of oil prices and production during the
 conflict. The Department of Energy disruption impact simulator pro-
jected that if a disruption had occurred, crude oil prices would have
 more than doubled. Moreover, the oil market would have distributed
 price changes to both imported and domestically produced oil, thereby
 affecting all industrialized countries dependent upon oil or its products.

The allied countries involved in maintaining open navigation in the Gulf
and 12 other countries belong to the International Energy Agency (IEA).
During an oil disruption, these countries agree to share their oil
reserves. This agreement is designed to spread the short-term impact of
an oil disruption to all member oil-consuming countries. In addition,
countries that are less dependent on Persian Gulf imports, like the
United States, will lose some of their imports from other market sources,
such as Mexico, as other oil-dependent countries compete for available
resources, Section 5 provides a detailed analysis of the economic impli-
cations of an oil disruption on oil prices and consuming countries.




Page 2                                      GAO/NSJAD-QO-282BR   The Persian Gulf
B-240294




Our objectives, scope, and methodology are in appendix I.

As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its issue date. At that time, we will send copies to the Secretaries of
Defense and State and to other interested congressional committees.
Major contributors to this briefing report are listed in appendix II. If you
have any questions, you may reach me at (202) 276-4128.




Joseph E. Kelley
Director, Security and International
    Relations Issues




Page 3                                      GAO/NSIAD-80-282BR   The Persian Gulf
Contents


Letter                                                                                                         1

Section 1                                                                                                      6
Allied Commitment to           Summary
                               Several Countries   Have Maintained a Lengthy Presence in
                                                                                                               6
                                                                                                               6
the Gulf Region                     the Region
                               U.S. Objective Is to Ensure Regional Security and                               6
                                    Maintain Oil Flow
                               U.S. Forces Vary as Threat Increases and Subsides                               6
                               Operation Earnest Will Begins                                                   7

Section 2                                                                                                      8
Overview of Country            Summary
                               Nine Non-Gulf Countries  Provided Support
                                                                                                               8
                                                                                                               8
Involvement                    Six Gulf States Supported the Effort                                            9

Section 3                                                                                                     10
Assessmentof Burden Summary
                    Cost of Contributions Is Difficult to Measure
                                                                                                              10
                                                                                                              10
Sharing             Not All Countries Provided Cost Data                                                      10
                               Non-Gulf Countries Assessed in Relation to Naval Assets                        12
                                   Provided

Section 4                                                                                                     14
Overview of Oil Prices Summary                                                                                14
                                                                                                              14
and Production During Non-Gulf  Countries’ Presence Demonstrated the
                           Importance of Gulf Oil
the Conflict           Operation Facilitated the Continued Free Flow of Oil                                   14
                               Little Increase in Worldwide Oil Prices Resulted                               16

Section 5                                                                                                     17
Analysis of Potential          Summary
                               IEA Members Did Not Have to Share Reserves
                                                                                                              17
                                                                                                              17
Impact of a Persian            Potential Impact of a Disruption on Oil-Dependent                              18
Gulf Oil Disruption                Economies
                               Impact of a One-Quarter Oil Disruption on the United                          21
                                   States
                               Potential Impact of a Disruption on Gulf Oil-Producing                         22
                                   Nations



                               Page 4                                      GAO/NSIAD-BO-2S2BR   The Persian Gulf
             Content8




Appendixes   Appendix I: Objectives, Scope, and Methodology                                24
             Appendix II: Major Contributors to This Report                                25

Tables       Table 3.1: U.S. Incremental Costs of Persian Gulf                             11
                 Operations
             Table 3.2: Relative Value of the Contributions of the Six                     13
                 Countries With Ships Operating in the Persian Gulf
                 (Between October 1987 and August 1988)
             Table 6.1: 1987 OECD Oil Statistics                                           18
             Table 5.2: Estimated Losses From a Total Disruption in                        20
                 Persian Gulf Oil Supplies
             Table 6.3: Estimated Losses Due to a Disruption in the                        21
                 Strait of Hormuz
             Table 6.4: The Potential Effect of a Disruption of                            22
                 Petroleum Shipments Through the Strait of Hormuz
             Table 5.5: Gulf States Oil Statistics (1987)                                  23

Figures      Figure 4.1: Oil Production 1986-89 (First Quarter 1987                        16
                  Through Third Quarter 1988 Covers Operation
                  Earnest Will)
             Figure 4.2: Quarterly Oil Prices (March 1987 Through                          16
                  September 1988)




             Abbreviations

             AWACS      Airborne Warning and Control System
                        Gulf Cooperation Council
             GDP        Gross Domestic Product
             GNP        Gross National Product
             IEA        International Energy Agency
             IEP        International Energy Program
             mbd        millions of barrels a day
             OECD       Organization for Economic Cooperation and Development
             OPEC       Organization of Petroleum Exporting Countries


             Page 6                                     GAO/NSIAD-90.282BR   The Persian Gulf
                                                                                                              *
Section 1

Allied Commitment to the Gulf Region


                        . Several Countries Have Maintained a Lengthy Presence in the Region
Summary                 . U.S. Objective Is to Ensure Regional Security and Maintain Oil Flow
                        l U.S. Forces Vary as Threat Increases and Subsides
                        l Operation Earnest Will Begins


                            The United States has maintained a naval presence in the Persian Gulf
Several Countries           region’ since 1949. France and the United Kingdom have also main-
Have Maintained a           tained a lengthy naval presence in the Gulf. The United Kingdom, for
Lengthy Presencein          example, has maintained ships in the region since 1980. The rationale
                            for this presence is the importance of Gulf oil to industrialized nations.
the Region

                            The economies of the United States and its European and Pacific allies
U.S. Objective Is to        are dependent on the uninterrupted flow of Persian Gulf oil. In the short
Ensure Regional             term, a disruption in the flow of oil from the Gulf may not pose an
Security and Maintain       immediate problem because oil may be available from other producers.
                            However, a mid- or long-term disruption would, no doubt, result in price
Oil Flow                    increases, thereby threatening the economies of all net oil-importing
                            nations.

                            The greatest threat to allied interests in the area is the spillover of a
                            regional conflict that could interrupt the flow of oil. Historically, rela-
                            tions in the Gulf region have been volatile. U.S. strategy has been to
                            demonstrate a commitment to the region that is firm, credible, and
                            durable in the face of conflicts that could affect established U.S. com-
                            mitments. The United States is therefore committed to ensuring stability
                            and security with the friendly regional states.


                            In the last 41 years of U.S. naval presence in the Gulf, forces have
U.S. Forces Vary as         varied depending on instability in the region. There was little threat to
Threat Increases and        U.S. interests between 1949 and 1978. Although the 1973 Arab oil
Subsides                    embargo was not the result of a military conflict in the Gulf, it created
                            an energy crisis that brought to the fore both the need for and risks of
                            overdependence on imported Gulf oil.

                            After 1978, the US. naval presence fluctuated as the threat increased
                            and decreased. The fall of the Shah of Iran, the Iranian hostage crisis,
                            and the Soviet invasion of Afghanistan in 1979 emphasized the need for

                            ‘The Persian Gulf region includes the Persian Gulf, North Arabian Sea, and parts of the Indian Ocean.



                            Page 6                                                    GAO/NSIAD-W-282BR       The Persian Gulf
                         Allled   Cmnmltment   to the Gulf bglon




                         a U.S. strategy in an area now vital to U.S. interests. Between 1979 and
                         1986, the United States increased its naval presence in the region from
                         three to six ships.


                         In 1986, Iran boarded a U.S. tanker, the SS President Taylor, and
Operation Earnest Will   attacked Kuwaiti tankers. The Soviets responded by offering to trans-
Begins                   port and escort Kuwait&flagged Soviet tankers. In March 1987, the Pres-
                         ident announced the U.S. intention to reflag and escort Kuwaiti tankers
                         in the Gulf, adding three more Navy ships to the region.

                         About this time, the United States called upon its allies to protect ship-
                         ping in the Gulf. The US. ship protection program became known as
                         operation Earnest Will. In May 1987, the United States extended its pro-
                         tection to neutral ships on a case-by-case basis. U.S. naval forces were
                         increased to 18 ships during the conflict, which ended when Iran and
                         Iraq declared a cease-fire in August 1988.




                         Page 7                                     GAO/NSIAD-90-282BR   The Persian Gulf
Section 2

Overview of Cbuntry Involvement


                         Nine Non-Gulf Countries Provided Support
Summary              l


                     l   Six Gulf States Supported the Effort


                         Six non-Gulf countries provided direct naval support during operation
Nine Non-Gulf            Earnest Will. Belgium, France, Italy, the Netherlands, the United
Countries Provided       Kingdom, and the United States cleared mines from navigational routes.
                         All these countries escorted and monitored their flagged ships in a
SUPpofi                  defined channel and patrolled international waters. The United States
                         formally extended its protection to neutral shipping on a case-by-case
                         basis.

                         The remaining three countries, Japan, Luxembourg, and West Germany,
                         provided indirect support. In reporting its contribution, Japan included
                         credit for a $300 million loan made to Oman and a $200 million loan to
                         Jordan, which is not a Gulf state. These concessional loans provide
                         favorable terms and low-interest rates.’

                         Japan also agreed to install a precision navigation system in the Gulf.
                         Beacons are almost completely installed along the friendly states’ coast-
                         lines and, by cross-fixing signals, will enable accurate ship location. This
                         system will not only aid in navigation but will also enhance mine-
                         clearing capabilities should other conflicts arise in the future.

                         Japan has negotiated individually with each Gulf state for the installa-
                         tion of the navigation system. Negotiations have been completed with all
                         the Gulf states except the United Arab Emirates. Negotiated terms
                         include maintenance and training agreements. The navigation system is
                         operational in all the friendly Gulf states except for Oman and the
                         IJnited Arab Emirates. The system’s cost, thus far, is $9 million.

                         Luxembourg, which has no navy, provided $400,000 for the upkeep of
                         forces.

                         West Germany interpreted its constitution as prohibiting it from pro-
                         viding a naval presence. It fulfilled a U.S.-NATO commitment to provide
                         naval forces in the Mediterranean, thereby freeing other naval forces
                         for relocation to the Gulf.



                         ‘Oman’s loan is for 23 years, with an B-year grace period, at a 4.4 percent interest rate. Jordan’s loan
                         includes a $132 million, 30-year loan at 2.9 percent interest for agricultural and road projects. At the
                         time of our review, negotiations for the remainder of the -Jordanloan were ongoing.



                         Page 8                                                       GAO/NSIAD-90-282BR       The Persian Gulf
                       Section 2
                       Overview of Country   Involvement




                       The Gulf States, which profited from the continued oil flow, also sup-
Six Gulf States        ported the effort. They provided vital access to their ports, bases, and
Supported the Effort   facilities as well as other assistance-including fuel for both U.S. ships
                       and aircraft.




                       Page 9                                      GAO/NSLAD-90-282BR   The Persian Gulf
                                                                                               1    ,
  Section 3

I Assessmentof Burden Sharing


                              Cost of Contributions Is Difficult to Measure
  Summary                   l


                            l Not All Countries Provided Cost Data
                            . Non-Gulf Countries Assessed in Relation to Naval Assets Provided


                                Establishing a common measure of the cost of naval operations was dif-
  Cost of Contributions         ficult because some countries, such as France, the United Kingdom, and
  Is Difficult to Measure       the United States, maintained a regional presence and had ships in the
                                area. Other countries, such as Belgium, Italy, and the Netherlands, have
                                smaller naval fleets and had to transit to the Persian Gulf region. Naval
                                operating costs differ due to ship sizes, crew complements, and per-
                                sonnel costs (which may or may not be included in naval operating
                                costs). Additionally, incremental costs (costs additional to normal naval
                                operation costs) are difficult to separate, largely because naval ships
                                would be operating elsewhere.


                                For the reasons noted, some countries did not provide cost estimates for
  Not All Countries             their naval operations in the Persian Gulf during the conflict. The
  Provided Cost Data            Department of Defense provided U.S. incremental cost data for opera-
                                tion Earnest Will. These costs totaled about $240 million (see table 3.1).




                                Page 10                                    GAO/NSIAlMO-282BR   The Persian Gulf
                                         Se&Ion 8
                                         Ansesement    of Burden Sharing




Table 3.1: U.S. Incremental   Costs of
Persian Cult Operations                  Dollars in thousands
                                                                                                   Fiscal year
                                                                                                                    Through Jan.
                                         Service operating     costs              1987’            1988              1989             1990
                                         Navy
                                         Aircraft operations                     $7,322         $24,914           $19,877             $211
                                                                                                                                   ____
                                         ShiD ooerations                         26.681          68.418            23.517              392
                                         Imminent danger pay                       1,266          9,690             3,335
                                         &herb
                                         -I_                                     31,627          47,835            23,706            3,20;
                                         Total Navy                            966,896        $150,857           $70,435           $3,809

                                         Air Force
                                         Travel/TAD”                                239           1.574              1.030              49
                                         Other                                     5,540          1,940                245               0
                                         Total Air Force                         $5,779         $3,514             $1,275              $49

                                         Army
                                         Travel/TAD                                 325           3,520             2.093            1,078
                                         SAAM lift                                  571             382               130                   0
                                         Supplies/
                                         _-_---    contracts                         45           2,496              1,573             157
                                         Other                                         0            146                 23               8
                                         Total Army                                $941         $8,544             $3,919          $1,243
                                         Total service operation costs          $73,716       $160,915            $75,529           $5,101

                                         Other coats and credits
                                         .--                                                                                     ___-
                                         Host   nation fuelsupport
                                         ..--____.                                     0        (57,138)           (73,179)       (24,392)
                                         USS Roberts Reoair                            0         15,907             40.922            -- 0
                                         kocurement (Army)
                                         --.--.                                   7,545          14,416                469               0
                                         Total                                 $81,281        $134,100           $(43,741)         (19,291)
                                         ‘The fiscal year 1987time periodis July throughSeptember1987
                                         “includes traveland NavalAir SystemsCommand,NavalSeaSystemsCommand,and NavalSupply
                                         SystemsCommandsupportcosts.
                                         “Temporaryadditionalduty.
                                         Source:Departmentof Defense

                                         It is difficult to establish a correlation between the number and type of
                                         naval assets provided by the countries (see table 3.2) and incremental
                                         costs identified. For example, Italy provided six combat vessels, about
                                         half of the naval force France had in the Gulf. While Italy’s cost esti-
                                         mate is nearly half of France’s estimated costs, the estimate appears dis-
                                         proportionate considering that the French force included a costly-to-




                                         Page 11                                               GAO/NSJAB90-282BR         The Persian Gulf
                                 Section 3
                                 bsewment    of Burden Sharing




                                 operate aircraft carrier. Furthermore, countries’ calculations of incre-
                                 mental costs may differ. The United States, for example, does not
                                 include personnel costs in its calculations except for hazardous duty
                                 pay.


                       When considering the non-Gulf countries’ contributions in burden
Non-Gulf Countries     sharing, we focused on the naval assets provided by the countries.
Assessedin Relation to Because not all countries provided cost estimates for naval operations,
Naval Assets Provided ment
                       we assigned a value to ships supporting operation Earnest Will. Involve-
                             began in October 1987, when all the countries’ ships had arrived in
                                the Gulf region, and ended with the cease-fire in August 1988. We used
                                1J.S.operating costs for various types of ships: the highest daily cost
                                was $74,000 for aircraft carriers; the lowest daily cost was $1,500 for
                                minesweepers. The values were then computed by days the ships were
                                deployed in the Gulf.

                                Table 3.2 identifies the naval assets, time frames, and values assigned.
                                IJnder this methodology, the allied contribution is about 60 percent and
                                the U.S. contribution about 40 percent. The United Kingdom, which had
                                a large number of ships in the region, suffers under this methodology
                                because it did not assign an aircraft carrier to the Gulf.




                                Page 12                                     GAO/NSIALHO-282BR   The Persian Gulf
     .                                    Section 3
                                          &semement      of Burden Sharing




Tablo 3.2: Relative Value 01 the
Contrlbutlonr ot the SIX Countrier With                                                      Estimated            Estimated             Relative value of
Shlpr Operating   In the Pewian   Qulf                                                           arrival/            months                   contribution
(Between October 1987 and August 1988)    Country and ships                           departure dates              deployed                     (Percent)’
                                          Belgium/Netherlandsb                                                                                             9
                                            1 Minesweeper                                    10/87-m/00                        6
                                            1 Minesweeper                                    1Q/87-07/88                      IO-
                                            2 Minesweepers                                   1Q/87-08/88                      11
                                            1 Succort shW                                                    I
                                          Franced                        -____-___                                                                        34
                                            1 Aircraft carrier                               1O/87-08188                      11
                                            7 Combatants                                     1O/87-08/88                      11
                                            3 Minesweepers
                                          QSupport      shipsC                               I o/87-08/88                     11          --.----
                                                                                                            I
                                          -’                                                                             --

                                          Italy                                                                                                               7
                                             3 Combatants
                                                1 Combatant                                 - 1O/87- 12187               ---________--
                                                                                                                               3        ---
                                          -- 2 Combatants-                                    I o/87-oat88                    11                          -
                                             3 Minesweepers                                   i oja7-oajaa                    11    -_____~-
                                             2 Support shipsC                                              f
                                          United Kingdomd                                                  .---                                     ---   IO
                                               3 Combatants                                  i o/87-08/88                11
                                               3 Minesweepers                                1o/87-08/88                 11               I_---.
                                               1 Command ship                                1o/87-08/88-__       .____- 11
                                               2 Support shipsC                                            I
                                                                                                            __----____             --
                                          United Statesd                                                                                                  40
                                          _ 1 Aircraft carrier                               1o/87-08/88
                                                                                               __-.-.__.                      11 -----
                                            9 Combatants
                                              a Combatants                                   I o/87-08/88       -____         11               ..___--
                                               1 Combatant                                   05taa-oat88 __-                   4
                                            6 Minesweepers
                                                         __-~~--~-                           i o/a7-oa+
                                                                                                      ___.---__               11
                                                                                                                              -_-..
                                            1 Command shio                                   1o/87-08/88                      11
                                            4 Amphibious ships?                                           f
                                          ___l_--.--
                                            2 Other ships                                                 I
                                          -_____-~--                                          ---~-
                                            10 Support shipsC                                             I

                                          aValues are based on daily U.S. operating cost estimates, excluding manpower and maintenance costs
                                          as follows: Carrier, $74,000; Cruiser, $18,000; Destroyer, $16,000; Frigate, $9,000; Minesweeper $1,500,
                                          Command ship, $14,000. It should be recognized that ship size, complements, and maintenance costs
                                          doffer among countries. Transiting costs and adminrstrative costs are not Included.
                                          ‘Belgium and the Netherlands combined forces.
                                          COperating costs for support ships unavailable.
                                          dThese countries had a presence in the Gulf region prior to 1987.
                                          ‘Costs unavailable for amphibious ships.

                                          ‘Data not readily available.




                                          Page 13                                                        GAO/NSIAD-90-282BR              The Persian Gulf
                                                                                              .    ’


Section 4

Overview of Oil Prices and Production During -
the Conflict

                         . Non-Gulf Countries’ Presence Demonstrated the Importance of Gulf Oil
Summary                  l Operation Facilitated the Continued Free Flow of Oil
                         l Little Increase in Worldwide Oil Prices Resulted


                             According to Defense Department officials, Earnest Will has done much
Non-Gulf Countries’          to further U.S. relations with the Gulf states. Through the operation, the
Presence                     United States has demonstrated its resolve and willingness to respond to
Demonstrated the             the legitimate defense needs of friendly states in the region.
Importance of Gulf Oil       An informal allied presence in the region prior to the Iran-Iraq cease-fire
                             indicated the importance of Gulf oil t% Western European and-Pacific
                             nations. As long as oil remains a primary source of energy for the indus-
                             trial world, the Persian Gulf region will remain vital to the security of
                             the United States, its allies, and friends.


                             One of the objectives of operation Earnest Will was to maintain the free
Operation Facilitated        flow of oil from the Persian Gulf area. As shown in figure 4.1, the opera-
the Continued Free           tion was successful. Oil disruptions did not occur, and Persian Gulf oil
Flow of Oil                  production actually increased slightly. In the first quarter of 1987, when
                             the President announced the reflagging and protection of Kuwaiti
                             tankers, Gulf oil production was at about 10 million barrels a day. By
                             the third quarter of 1987, Gulf oil production had increased to about 12
                             million barrels a day. This increased production was also reflected in a
                             slight increase in global production as well.




                             Page 14                                    GAO/NSIAD-90-282BR   The Persian Gulf
                                                                Section 4
                                                                Overview of Oil Pricee and Production   During
                                                                the Cmflict




Ff9ure 4.1: Oil Production                   1988-89 (First Quarter 1987 Through Third Quarter 1988 Covers Operation Earnest Will)
70 Mllllonoot Bamlmpof Day
65
60                                                                                                                                 mL8mmmmmmm~mmmmmmmmm
                                                                                                                                                     *
w •mmmmmmmmmm~mmmmmm               .=--m8m..................=‘=
                  mmmmmmmmmmmmm0mmg0            l
50

;         -                                                             _   _ -:        -.--

a5
a0
25
                                                                                                                              -5-e.
20 ww”w~“www---*--                       ---am. wwww~ww~wwwww.L-------------w...ww.--                            -www-- ww---             I.www.wmnw------
16


    5
    0                                                                                                                         .-   .,._
              . --   -.
    I:1               88:2        00:)         811:4    81:l      872         ma      07:4       e&l       88:2       00s          a&4     I)*1      89.2      89.8

              -           The Persian Gulf
              ----        OPEC
              v           Market Emnornlea
              nnn n       World




                                                                Oil supply disruptions harm all net oil-importing nations regardless of
Little Increase in                                              their dependence on a particular regional supply. An oil loss from a par-
Worldwide Oil Prices                                            ticular region would, in the absence of an oil production surge in undis-
Resulted                                                        rupted regions and accompanying oil austerity programs, create global
                                                                competition for reduced supplies. The demand for reduced oil supplies
                                                                would result in higher oil prices for all.

                                                                International Energy Agency (IEA)’ countries have a common interest in
                                                                keeping Gulf oil flowing because they have agreed to share their
                                                                reserves and an oil disruption would result in price increases. For oil-
                                                                consuming nations, dramatic price increases adversely affect their econ-
                                                                omies. Fortunately, the Iran-Iraq war had little effect on oil prices.

                                                                 ‘The IEA was established to facilitate responsesto short-term energy disruptions and long-term
                                                                supply problems. IEA members are Australia, Austria, Belgium, Canada, Denmark, Greece, Ireland,
                                                                Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzer-
                                                                land, Turkey, the United Kingdom, the United States, and West Germany.



                                                                Page 16                                                     GAO/NSL4D!bO-282BR    The Persian Gulf
                                      Section 4
                                      Overview of’ Oil Prices and Production           During
                                      the Cmflict




                                      Figure 4.2 presents three indicators of the cost to obtain a barrel of oil
                                      during the operation. The first indicator is the weighted average cost of
                                      a barrel of oil, including insurance and freight, for members of the IEA
                                      agreement. The line shows that oil prices declined steadily until the
                                      third quarter of 1986 and rose slightly until the announcement of U.S.
                                      operations. These prices ranged from around $14 to $18 a barrel for the
                                      duration of the operation.

                                      The second price indicator is the landed, or final, cost of a barrel of oil
                                      that is shipped from the Persian Gulf to US. ports. The third indicator is
                                      the cost of a barrel of oil at Persian Gulf ports. This is the price of oil on
                                      board vessels destined for the United States, excluding transportation
                                      and insurance costs. Figure 4.2 indicates that the difference between the
                                      second and third indicators did not significantly change. This suggests
                                      that the risk-real or imagined-from       1986 to the third quarter of 1989
                                      also did not change.


Flgure 4.2: Quarterly
                   011Price5 (March
1987 Through September 1988)
                                      26      Dollara per Barrel




                                       8


                                       0

                                       88:l        88:2       353       86:4     57A      87:2      m3      87.4    2&l       88.2       08:3      88:4
                                       Yean:olJaltora

                                              -           Mean Coe.t,lnsurance L Freight to IEA Member8
                                              mm-1        LandedCoattotheUSfromArabOPEC
                                              m           Freight On Board to the US from Arab OPEC

                                      Freight On Board (FOB) prices Exclude costs related to insurance and transportation              to the United
                                      St&S




                                      Page 16                                                             GAO/NSIAD90-282RR          The Persian Gulf
Sect&   5

Aklysis of Potential Impact of a Persian Gulf
Oil Disruption

                      . IEA Members Did Not Have to Share Reserves
Summary               l Potential Impact of a Disruption on Oil-Dependent Economies
                      l Impact of a One-Quarter Oil Disruption on the United States
                      . Potential Impact of a Disruption on Gulf Oil-Producing Nations


                          lJnder IEA'S International Energy Program (IEP), member countries vol-
IEA Members Did Not       untarily agree to share oil reserves. This emergency sharing system is
Have to Share             the Agency’s mechanism for reducing the adverse effects of a serious oil
Reserves                  supply disruption.’ Under the system, member countries agree to

                      l maintain emergency reserves equal to 90 days of net oil imports,
                      l establish measures to reduce demand by 7 to 10 percent during a serious
                        oil disruption, and
                      . subject their oil supplies to an international allocation system, using a
                        predetermined formula to share with or receive oil from each other if
                        disruptions exceed 7 percent of their imports. Outside the system, mem-
                        bers also have agreed to cooperate in disruptions that are smaller than 7
                        percent. The system guarantees members access to essential volumes of
                        oil, but not necessarily at the same prices.

                          Oil from the Persian Gulf accounts for 42 percent of the total net oil
                          imports of all Organization of Economic Cooperation and Development
                          (OECD) countries.” Table 5.1 shows, among other things, the Gulf oil
                          imports of the countries that contributed to open navigation in the Per-
                          sian Gulf. It also shows that Japan, the United States, and the smaller
                          European nations that did not participate in operation Earnest Will were
                          the main importers of Persian Gulf oil during this period. Measuring
                          dependence on the Persian Gulf as the ratio of imports from the Gulf to
                          daily consumption, the Netherlands and Japan were most dependent on
                          oil from the Gulf. The Netherlands and Japan depended on the Persian
                          Gulf for 74 percent and 58 percent of their daily oil consumption,
                          respectively. In contrast, the U.S. dependence on the Persian Gulf oil
                          was only 7 percent. In daily consumption, imports from the Gulf repre-
                          sented 27 percent of the total for OECD countries.



                          ’ For further information on the Emergency Sharing System, see GAO report Status of U.S. Participa-
                          tion in the International Energy Agency’s Emergency Sharing System (GAO/NSIAD-8599, June 13,
                          19%).

                          ‘OECD members are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Greece, Iceland,
                          Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,
                          Switzerland, Turkey, the United Kingdom, the United States, and West Germany.



                          Page 17                                                   GAO/NSIAD-90-282BR      The Persian Gulf
                                      Section 5
                                      Analyrb of Potential   Impact of a Persian
                                      Gulf OU Disruption




Table 5.1: 1987 OECD Oil Statistics
                                                                                                       Average daily       1987 GDP”
                                                                    1987 Daily net oil importsb         consumption              in U.S.
                                                                       Thousands/barrels                 (thousands/        (dollars in
                                      Country                         OPEC        Gulf      TotalC            barrels)        billions)
                                      Belgium                             257        162         456          .-___ 452           $142
                                      France                          .___684        459
                                                                           --__ ____..--~-     1,742               1,789            a73
                                      West Germany ___----                679        187      2,281                2,424-----i-j%
                                      Italy
                                      ----..-   .---~~----         ~-   1,307        782       1,718    -__        i ,855           749
                                                                                                                                  .___
                                      Japan                            3,198 ~~~   2,637      4,418
                                                                                  _---~~~-..--__.~-                4,454          2,376
                                      United Kingdomd                     164        277     -1015          7K                      576
                                      United States                     3,053      1,072      5,914               16,665          4,497
                                      Luxembourg
                                      _----____-.~--.-.-.                     e          e        27                   27             e
                                      Netherlands                         773        516
                                                                            -._-_____---         562 -..~-____.       686           214
                                      Others                           3,120
                                                                        ___-       2,036      2,725 _~..--.               e           e
                                      Total                           13,235       8,128    18,828             29,955                 e
                                      %ross domesticproduct.
                                      t’Basedon daily averagesreportedquarterly
                                          ImportsareextractedfromOPECtotals.DifferencesbetweenOPEC totals and total country
                                      ‘,Gulf
                                      ImportsIndicateadditionalsourcesof oil Importedor producedby countries.
                                      “Net exporter
                                      ‘Not applicable.


                                      If a disruption had occurred, the near-term impact on oil-consuming
Potential Impact of a                 economies would have been serious. Dramatic increases in oil prices
Disruption on Oil-                    have historically affected the economies that rely on oil or its products.
Dependent Economies                   For example, following the 1973-74 embargo, crude oil prices nearly
                                      tripled. This increase contributed to a l . l-percen.t decrease in the real
                                      gross national product of the United States in 1975. Further, in the year
                                      following the 1979 Iranian shutdown, oil prices nearly doubled, contrib-
                                      uting to a 13.5-percent inflation rate and a 7.1-percent unemployment
                                      rate in 1980 in the United States.

                                      Generally, oil supply disruptions immediately increase the spot market
                                      price of oil. Lags in market response to the change in market conditions
                                      and increased inventory buildup may create a period of rising prices
                                      even after the disruption. The size of the disruption, market tightness,
                                      and the availability of emergency reserves would, however, ultimately
                                      determine the severity of the macroeconomic consequences of inflation,
                                      unemployment, and economic stagnation. Ultimately, oil supply disrup-
                                      tions harm all net oil-importing nations regardless of their dependence
                                      on supplies from a disrupted area.


                                      Page 18                                                 GAO/NSIAD90-282BR      The Persian Gulf
.   Se&on 5
    AnalyeL of Potential   Impact of a Persian
    Gulf Oil Disruption




    The potential impact of disruption of oil imports from the Gulf on
    selected OECDoil-consuming countries is shown in tables 5.2 and 5.3. The
    generated estimates are derived using the assumptions in the Depart-
    ment of Energy’s Disruption Impact Simulator and petroleum statistics
    from the period. Table 5.2 presents the most severe impact that could
    have occurred at the outset of a disruption in the first quarter of 1987
    through the launch of operation Earnest Will at the beginning of the
    second quarter of 1987. Table 5.2 shows the potential impact resulting
    from a disruption to oil transshipped through the Strait of Hormuz as
    well as oil shipped through existing regional pipelines, which were oper-
    ating at 24 percent of capacity.

    These tables show for the United States an initial oil import loss from a
    disruption, an increased oil import loss resulting from competition for
    available oil in the free market, and a slightly reduced loss resulting
    from IEP members’ sharing of reserves or member-produced oil. A total
    disruption of petroleum from the Persian Gulf in the first quarter of
     1987 would have meant a loss of 6.63 million barrels a day (mbd) of
    worldwide supplies, of which 5.63 mbd would have been lost to IEA mem-
    bers. Among IEX members, Japan and the United States would have an
    immediate loss of 1.93 mbd, and 1.28 mbd, respectively. Moreover, had IEA
    members sought to replace the 5.63 mbd from other sources (without any
    global surge production), they would have obtained only .44 mbd, leaving
    them with a shortfall of 5.19 mbd. A disruption of the magnitude hypoth-
    esized in this report would have been large enough to trigger the IEP.
    This factor is evidence that the Persian Gulf is critically important as a
    prime source of petroleum to IEA members collectively. The implementa-
    tion of emergency burden sharing arrangements under the IEP would
    make it possible for member countries to collectively face a shortage of
    4.81 mbd before consuming strategic petroleum reserves to meet their
    domestic needs. The IEP redistributions would partially alleviate U.S.
    shortfalls but worsen shortfalls in Japan, West Germany, and non-1E:A
    consuming nations.




    Page 19                                      GAO/NSlAD-90-282BRThe Persian Gulf
                                          Section 6
                                          Analysis of Potential           Impact of a Persian
                                          Gulf Oil Disruption




Table 5.2: Estimated LOWM From a Total
Disruption in Perrian Gulf Oil Supplies   Millions     of   barrels a dav
                                          Country                                                   Immediate       1058~          Free marketb              Full lEPC
                                          U.S. and territories                                                       1.28                    2.30                 2.17
                                          Canada                                                                     0.10                    0.26                 0.11
                                          Japan                                 ___-__                               i .93       -----..-~.-~0.76             ..~...0.80
                                          Australia/        New Zealand                                              0.08                    0.13                 0.04
                                          Norway/Sweden
                                                              ~-. ~.--                          -                    0.03                    0.10
                                                                                                                         -.----~__--__-._-~~-.~                   0.02
                                          United       Kingdom/       Ireland                                        0.09
                                                                                                                     o,03-.---.-~o~~-~-.-~~~. 0.29                0.04
                                                                                                                                                                  o,,8
                                          Benelux/Denmark
                                                                                ___--                        __-~            -._-.. -.-.---.-.           ~     ~
                                          West--..---.--_._--I_---
                                                 Germany                           ___-                            0.27                  0.41                     0.65
                                          Austria/      Switzerland                                                0.04
                                                                                                    --__--___.---...--..___--.--         0.08                     0.14
                                                                                                                                                         ..~. .~~_...
                                                                                                                                                                   ~-.
                                          Spain/Portugal                                                           0.40                  0.19_
                                                                                                                                     __._~_             -.. ~--~ 0.23
                                          Italy                                                                    0.80                  0.31                     0.26
                                          Greece/Turkey                                               ____-..--__--..._-..---.-_---~-.-~ 0.12
                                                                                                                   0.58                                     .~~~ -0.18
                                                                                                                                                                   ~~
                                          Total IEA                                                               5.63                   5.19                      4.91
                                          Non-IEA/          non-OPEC                                            -    1 .oo                       1.44              1.82
                                          Total tree world                                                          6.63                         6.63              6.63
                                          “Loss to each IEA member from a disruption in the Persian Gulf
                                          “Estimated shortfalls of petroleum supplies if each IEA member were to replace a loss by competing for
                                          suppltes in the global market. Assumption is that supplies to be obtained are normal demand wrthout
                                          reliance on reserves or surge in domestic production

                                          ‘,Estimated shortfall is based on IEP formula and represents IEP rather than marketplace distribution.
                                          Shortfalls could be met from member’s strategic petroleum reserves.
                                          Source: GAO estimate based on Department of Energy Disruption Impact Simulator.


                                          Another way to look at the effects of a potential disruption of the flow
                                          of petroleum in the Persian Gulf is to consider a disruption of oil
                                          shipped through the Strait of Hormuz. Table 5.3, which excludes over-
                                          land pipeline delivery systems, indicates the probable effects of ship-
                                          ping disruptions on the Strait of Hormuz-the main sea channel for
                                          transportation in the area.

                                          A total loss of petroleum shipped through the Strait of Hormuz in the
                                          first quarter of 1987 would have resulted in a 5.1 mbd loss to the free
                                          world. Japan would have incurred the largest loss. The disruption would
                                          have triggered the sharing of strategic petroleum reserves, thereby les-
                                          sening the impact of the disruption.




                                          Page 20                                                                   GAO/NSLAD-90-282BR              The Persian Gulf
                                       Section 6
                                       Andy&     of Potential   Impact of a Persian
                                       Gulf OR Disruption




Table 5.3: Estimated Loss08 Due to a
Disruption in the Strait of Hormuz     Millions of barrels a dav
                                       Country
                                       ---_I_-                  -
                                                                                      Immediate   loss     Free market            Full IEP
                                       U.S. and territories                                     1.08                   1.77           1.65
                                       Canada                                                   0.07                   0.20           0.06
                                       Japan
                                       -..                                                      1.82                   0.59           0.63
                                       Australia/ New Zealand                                   0.06                   0.10           0.02
                                       Norway/Sweden                                       ___ 0.02                    0.08           0.00
                                       United Kingdom/ Ireland                                  0.05                   0.22         -0.01
                                       Benelux/Denmark
                                       .____                                                    0.03                   0.18           0.13
                                       West Germany                                             0.17                   0.32           0.57
                                       Austria/ Switzerland                                     0.02                   0.06           0.12
                                       Spain/Portugal
                                                    ---__-.                                     0.26                   0.14           0.19
                                       ltaly      _--._---- --..                            -~ 0.55                    0.24           0.20
                                       Greece/Turkey
                                       --                                                       0.32
                                                                                               ----                    0.09           0.15
                                       Total IEA                                                4.44                   4.00           3.71
                                       Non-IEA/non-OPEC ___                                     0.67                   1.11           1.40
                                       Total free world                                           5.11                 5.11           5.11
                                       Source:Departmentof EnergyDisruptionImpactSimulator

                                       If oil flowing through the pipelines had increased to full capacity and
                                       was not disrupted, the impacts shown in the tables may have been miti-
                                       gated. For example, the impact to free world oil-consuming countries
                                       would have been lessened from 5.1 mbd to 1.13 mbd. This loss would not
                                       have triggered the emergency sharing system of the IEP. However, there
                                       is no assurance that the conflict would have been confined to sea lanes
                                       and would not have affected the flow of oil through the pipeline.


                                       Dramatic oil price increases have a domino effect on oil-dependent econ-
Impact of a One-                       omies, such as the United States, and affect inflation rates, unemploy-
Quarter Oil Disruption                 ment, and the gross national product. Table 5.4 shows the potential
on the United States                   effect on the United States from a disruption in the Strait of Hormuz.
                                       The first quarter of 1987 reflects the average costs of oil and its byprod-
                                       ucts as well as the consumption and oil imports. These baseline figures,
                                       coupled with the assumptions in the model, identify the potential effects
                                       of an oil disruption on the US. economy.

                                       The analysis is based on Department of Energy’s model using the fol-
                                       lowing baseline conditions. In 1987, the price of imported crude oil was
                                       at $18 per barrel, and gasoline prices and heating oil prices averaged
                                       $0.96 and $0.80 per gallon, respectively. Consumption of petroleum was



                                       Page 2 1                                                   GAO/NSIAD-90.282BR      The Persian Gulf
                                       Section 6
                                       Analysis of Potential   Impact of a Persian
                                       Gulf’ oil Disruption




                                       estimated at 16.6 mbd with a net import of 6.3 mbd. The analysis assumes
                                       that the disruption ends by the start of the second quarter of 1987.

                                       Assuming only a first quarter, 1987, oil disruption from the Strait of
                                       Hormuz, the simulation reveals that imported crude oil prices would
                                       have more than doubled during the quarter but would have returned to
                                       a price of $24 per barrel by the fourth quarter. If the disruption ended
                                       in the first quarter of 1987, the economy would recover quickly with the
                                       gross national product loss limited to .58 percent in the fourth quarter.

Table 5.4: The Potential Effect of a
Disruption of Petroleum Shipments                                                                          1987
Through the Strait of Hormuz                                                          1 st qtr
                                                                                 (Base line
                                       ____-.---                                conditions)      1st qtr    2nd qtr     3rd qtr    4th qtr
                                       Crude
                                       ..--    oil pricea
                                                    ---                               $18.13    $42.56        $33.23     $27.46     $23.90
                                       Gasoline
                                       --          priceb                              $0.96      $154          $1.32      $1.18      $l.lo
                                       Heating oil pricer’                             $0.80 _ $1.38            $1.16      $1.02      $0.94
                                       U.S. consumptionC.-                             16.53      14.76         15.45      15.92      16.42
                                       U.S. net importsc                                6.26 .._____-
                                                                                                   4.49          4.97       4.90       5.78
                                       GNP lossd                                                 -1.78         -1.26      -0.87      -0.58
                                       Unemployment gaind                                          0.71          0.51       0.35       0.23
                                       Inflation aain”                                             2.66          1.90       1.30       0.87
                                       Terms of trade lo@                                     -$11.77        -$7.64     -$4.46     -$3.19
                                       aPriceper barrelof importedoil
                                       bPriceper gallon
                                       Cmillionsof barrelsper day
                                       dpercentagepoints
                                       ebillionsof dollars
                                       Source:GAOestimatebasedon the Departmentof EnergyDisruptionImpactSimulator.


                                       If a long-term disruption had occurred, the impact on oil-producing
Potential Impact of a                  countries would have been serious, considering the importance of oil to a
Disruption on Gulf Oil-                country’s gross national product and as a foreign currency earner. Oil
Producing Nations                      represents a major part of the gross national product for all the Gulf
                                       states. For Gulf states that are friendly with the United States, 1987 oil
                                       exports to the OECDvaried from 95 percent of Bahrain’s 1987 gross
                                       national product to 19 percent of Kuwait’s gross national product. Oil
                   ”                   exports to 0%~ were important to Iran and Iraq as well. Oil exports for
                                       Iran accounted for 6 percent of its gross national product, while Iraq’s
                                       exports comprised 20 percent of its gross national product. Moreover,



                                       Page 22                                                   GAO/NSIAD-90-282BR      The Persian Gulf
                                                 Election 5
                                                 Analyst0 of Potential   Impact of (L Persian
                                                 Gulf oil Disruption




                                                 for all the Gulf states, oil exports were a critical foreign currency
                                                 earner. For example, in 1987 Iraq earned $8 billion from petroleum
                                                 exports to OECDcountries. This represented 89 percent of its total
                                                 exports to these countries. Similarly, Iran’s petroleum exports to OECD
                                                 countries totaled $10 billion, or 87 percent, of its total exports to these
                                                 countries. During the period, Saudi Arabia’s petroleum exports repre-
                                                 sented 70 percent of its total exports to OECDcountries. Table 5.5 shows
                                                 the amount of Gulf oil exported to OECDcountries in 1987 and its value
                                                 in US. dollars.

Table 5.5: Gulf States 011 Statistics   (1987)
                                                                                        Oil exports to                                  1997 gross
                                                                                     OECD countries0      Value of 1987 oil       national product
                                                                                           (millions of        exports (U.S.    in (U.S. dollars (in
                                                 Country                                 barrels/day)   dollars (in billions)              billions)
                                                 Bahrain                                           0.04                $4b                     $4.3
                                                 Kuwait                          -                  0.9    -     ._____ 5                      25.8
                                                 Qatar                                              02                  2                       4.2
                                                 Saudi Arabiac                                      2.8                22                      69.7d
                                                 United Arab Emirates
                                                               ----.                                1.1       -_        9                      22.9
                                                 Iran                                               1.2 _____-         IO                     165.9
                                                 Iraq                                               1.1                 a                      40.0
                                                 “Average1987daily oil expects.
                                                 hBahrainvalueof oil is only for 1988
                                                 ‘Oman exportsreportedwith SaudiArabia.
                                                 dDoesnot IncludeOman’sgrossnationalproduct,which was $1.3billion




                                                 Page 23                                                   GAO/NSIAD-90-282BR     The Persian Gulf
Appendix I

Objectives, Scope,and Methodology


               Our objectives were to (1) identify the countries involved in sustaining
               open navigation in the Persian Gulf and the role each played, (2) analyze
               the value of the contributions provided by those countries, and (3)
               assess the potential economic impact of the disruption of Gulf oil
               imports on the Gulf States and industrialized countries. The data
               obtained covers March 1987 and August 1988.

               We contacted embassy officials from Bahrain, Belgium, France, West
               Germany, Italy, Japan, Kuwait, Luxembourg, the Netherlands, Oman,
               Qatar, Saudi Arabia, the United Arab Emirates, and the United Kingdom
               and West Germany, to obtain information on their involvement and cost
               estimates. For information on U.S. involvement, we contacted officials
               at the Departments of Defense and State. Because of the time limits
               involved, we did not verify the information provided to us or obtain
               written agency comments from the Department of Defense. However, we
               met with appropriate DOD officials and obtained their official oral
               comments.

               For those countries that were unable to provide us cost data on naval
               assets, we developed a relative value based on US. naval ship operating
               costs.

               Using the Department of Energy’s Distribution Impact Simulator, we
               developed estimates of the probable economic effects of a Persian Gulf
               oil disruption. The Disruption Impact Simulator has been used by other
               U.S. government agencies, DOE included, for the assessments of poten-
               tial economic effects and policy implications of other oil flow disrup-
               tions. We did not independently validate the accuracy of the simulator’s
               predictions.

               We performed our work between January and March 1990 in accor-
               dance with generally accepted government auditing standards.




               Page 24                                   GAO/NSIAD-90-282BR   The Persian Gulf
  Ppe

&lGzi Contributors to This Report


                        Louis H. Zanardi, Assistant Director
National Security and   Patricia L. Martin, Evaluator-in-Charge
International Affairs   Gezahegne Bekele, Economist
Division,
Washington, D.C.




(467964)                Page 25                                   GAO/NSLAD-SO-282BR   The Persian Gulf
---.-   -_-.--._-
               - .-.--I_......-I- ___
                                    - ___. . _^._
                                               .._”..I - l..l.-I”-.-.._..-.--- --.-----