Unprepared for the Oil Shockwave
By Bill Moore
It all begins with a revolution in Nigeria. Six-hundred to seven-hundred thousand barrels of sweet, light crude are taken off the market virtually overnight. The price of oil traded on the NYMEX suddenly shoots up to over $70 a barrel. This was quickly followed by fighting in Northeastern Saudi Arabia, near its oil refinery complexes, driving crude up into the $90 range.
With a jittery world already struggling hard to stay afloat economically, al-Qaeda terrorists hijack an oil tanker and slam it into the oil facility in Valdez, Alaska, setting it ablaze and closing down the Alaska pipeline, depriving the West Coast of much of its oil.
Thankfully, none of these events have actually occurred. Instead, they were "war game" scenarios thrust on members of America's political elite, including two former CIA directors, who late last June gathered at a hotel in Washington, D.C. to highlight the nation's vulnerabilities as a direct consequence of its over-dependence on oil.
One of the participants, who played the role of Secretary for Homeland Security, was R. James Woolsey, now a vice president with Booz Allen Hamilton, as well as being a member of the National Commission on Energy Policy. Between 1993 and 1995 he was Director of Central Intelligence under the Clinton Administration.
With oil prices now in the high-$60s, as opposed to the mid-$50s in late June, Mr. Woolsey generously took half an hour out of his busy schedule -- between his many travels, he's overseeing the remodeling of his home -- to talk to me about the Oil Shockwave Simulation, and what the participants learned. He sounded tired, but his personal assistant assures me, he was about to take a much need vacation on his boat.
Although the scenario of the simulation took place over the course of a year, the actual game itself lasted about five hours. The participants formed what would have been called a "Principals" group in the Clinton years, led by the National Security Advisor. They played the roles of various members of the National Security Council, including Secretaries of Defense, Energy, State, and the Joint Chiefs.
When the game was over and only 3.8 million barrels of oil a day (4.5%) had been removed from the market out of 83 million bpd, the world was headed into a major recession with 2 million jobs lost in the U.S. alone. Gasoline was $5.17 a gallon, while heating oil cost a numbing $5.14 a gallon. The S&P 500 dropped 28 percent and consumer confident sank by 30 percent. A barrel of oil traded for $161.
To make matters worse, China, who was demanding the US stop selling arms to Taiwan, had just invaded disputed islands in the South China Sea claimed by both Taiwan and Japan and rumored to be rich in offshore oil and gas deposits. Meanwhile, Saudi Arabia was demanding changes in Washington's policy towards Israel and the Middle East in order to open its oil taps further.
For Woolsey, this wasn't the first "war" game he's played during his long career in government and business, but it was the first one focused strictly on an energy scenario.
From his perspective, the simulation had two objectives: to see how government might respond to the various energy disruptions; and "to bring home to people something that is very much the case, which is that in the short run, there are no very good options".
"In order to be able to deal with a series of crisis of these sorts, and by the way, none of these was absolutely catastrophic, these were all small to medium-sized crisis. But, in order to deal effectively with something like that, one needs to have taken other decisions some years earlier to make the situation more amenable. Just trying to deal with things like this with the strategic petroleum reserve or diplomacy is most unsatisfactory".
If a revolt in Nigeria and fighting near Saudi's oil refineries aren't "catastrophic", what would be? Woolsey points to the opening scenario in Robert Baer's "Sleeping With the Devil" in which terrorists take over a 747 and crash it into sulfur clearing towers in Northeastern Saudi Arabia.
"That would probably take 6 million barrels per day offline for something over a year while those facilities were repaired," he said. "That would suddenly send oil way above $100 a barrel, I think most others are convinced. That would be something more in the nature of a catastrophic occurrence".
There's an understatement.
|I asked Woolsey if Islamic radicals were the only terrorists we should be worried about. While he agreed that someone like a Tim McVeigh demonstrated that other hate groups are capable of destructive acts, he believes they are less of a threat, because these home-grown groups are under closer surveillance by the FBI. He thinks catastrophes of the scope of 9/11 are more in keeping with the capabilities of al-Qaeda whose mission is to bring down the West by destroying its economy.|
When the simulation was over, Woolsey said he was pretty much where he'd been for "some years".
"We need to move smartly to reduce our reliance on oil, because as long as the infrastructure is tied to oil, and two-thirds of the world's oil is tied up in the Middle East, we are going to be vulnerable to sudden and catastrophic disruption. Oil, in that way, is unlike any other economic product many of us have to deal with. If somebody took it upon themselves to cut off two-thirds of our supply of rice from abroad, we would just eat more wheat products. But we can't do that with oil today because the transportation infrastructure is so tied to it".
He pointed out that in the 1970's, some 20 percent of our electricity was generated by burning oil. That number is now down to around 2 percent, so we're not facing an electricity problem, but a transportation problem. Building more nuclear power plants or wind farms won't have much impact on the problem. (Editor's comment: That is until we start powering more of our transportation system with electricity in the form of plug-in hybrids and electric vehicle).
Woolsey is of the opinion that "the people are listening more than the politicians. The Congress has been listening to some extent, and the White House began to get into this issue a bit a few months ago when the President went down into Virginia and made a speech at a biodiesel plant and talked about giving tax credits for hybrids and modern diesels, and promoting ethanol and biodiesel. I think he didn't go far enough. The Executive Branch hasn't talked much about hybrids, for example, which I think are very promising. They seem to be fixated on ethanol made from corn and biodiesel made from soybeans. Both of those are pretty expensive feedstocks".
As a member of the National Commission for Energy Policy, Woolsey sees cellulosic ethanol and TCP (thermal conversion process), which turns just about any type of waste into a diesel-like fuel, as a "much wiser" pathway to sustainable fuels. He also wants to see a much more aggressive efforts to deploy hybrids, especially plug-in hybrids.
"I would like to see national decision makers begin to focus on some of those technologies… I'd like to see a lot more support for those than is in the energy bill or has come out of the Executive Branch statements", he said. "I think to be fair, I have to say that there has been at least some support and some improvement in consciousness in the Congress and Executive Branch on these issues in the last few months".
I asked him one final question. What would be the first thing he would do if he were the Secretary of Homeland Security to forestall the consequences of the scenarios outlined in the Oil Shockwave simulation?
He responded that most actions would require legislative initiatives and would not be within the purview of Homeland Security, but he if could influence the course of events, he'd immediately call for the staged implementation of "substantial increases" in corporate average fleet economy or CAFÉ standards, while adding a "good dose of flexibility" in how they are implemented.
He also thinks targets need to be set to transition to alternative fuels that work with today's infrastructure.
"I am not talking about hydrogen because hydrogen fuel cell cars are a decade or two off, anyway, and besides, they need a complete restructuring of the country, as well as the automobile business. That‘s going to take a long time and will be difficult to coordinate.
"I am talking about vehicles and fuels that can be used in the existing infrastructure, and I'd like to see those promoted by legislation, by tax credits, by CAFÉ standards, by every way one could possibly promote them on an urgent basis".
He would want to encourage carmakers to stop dragging their heels through a combination of "stick and carrot" policies.
"I think that in this case, [we] need to look at this oil and oil use issue differently than we look at most products in our economy. Most products are not so closely tied to national security and most products have something you can substitute for them. But oil, right now, does not. And I think it is a serious matter of national security to try to make it be the case that we radically reduce our use of it".
Doing so, he pointed out, will have other benefits including reducing global warming gases.
"From the point of view of avoiding economic catastrophe from a terrorist attack or a regime change through a coup in, say Saudi Arabia, it's a matter of very high priority to get these alternatives to oil-based products, and these improvements in mileage with new types of vehicles on the market in large numbers as soon as possible".
Woolsey takes his message seriously by driving a Toyota Prius and a Lexus 400h hybrid SUV. Both bear a bumper sticker given him by a friend. They read, "Osama bin Laden hates this car".