Oil Crisis - A Simulated Scenario

June 19, 2005 – Vol.10 No.13

OIL CRISIS - A SIMULATED SCENARIO.

The price of oil flirts above $60 a barrel. In reaction the Dow Jones Industrials sheds 300 points in two days. Hearings take place on Capitol Hill to discuss the ongoing war in Iraq. Should the U.S. pull out?

Anxious Congressmen, facing mid-term elections in little over a year, asked serious questions this week about growing U.S. and Iraqi casualties and the insurgency, but none asked about the oil, Iraq’s and the region’s.

Questions they should have asked: What would happen to oil exports from the Persian Gulf region if the U.S. packed up and left? Would a multinational war erupt? (Call it World War III.) Would that war slow the flow of oil to the U.S. and the rest of the world? What would be the economic consequences of an oil crisis of this magnitude?

They didn’t ask, at least in public.

Fortunately, elsewhere in Washington others are concerned about short term oil supply disruptions from the Middle East (For long term supply problems see THE LONG TERM DEBATE - IS OIL RUNNING OUT? below)

Securing America's Future Energy (SAFE) and the National Commission on Energy Policy (NCEP) have cosponsored Oil Shockwave - a simulation event of what could happen to the U.S. economy if an oil crisis were triggered by regional instability and/or acts of terrorism.

The crisis they define is relatively minor: removing as little as 3.5 million barrels of oil a day out of 83 million shipped in the global market.

Input from former members of the oil industry, former and current military officials, intelligence and national security experts, politicians, and other specialists contributed to the crisis scenario.

In the opinion of this group of knowledgeable (and notable) participants the following consequences could result from a relatively small cut in oil supplies:

--- Global oil prices would skyrocket to $161 per barrel.

--- U.S. gasoline prices would reach $5.74 per gallon.

--- Heating oil prices would go to $5.14 per gallon.

--- The gross domestic product (GDP) would fall for two consecutive quarters: think recession.

--- Consumer confidence would drop by 30 percent: consumers would stop spending.

--- Inflation would rear its ugly head: the consumer price index would spike to 12.6 percent.

--- The trade deficit would balloon to $1.087 trillion. (Washington now calls that current accounts deficit.)

--- The S&P 500 would drop by 28 percent (The S&P is considered a better measure of investor confidence than the Dow Jones Industrials, but the Dow would take a hit too, for sure.

Other key findings:

--- Little could be done in the short term to protect the U.S. economy unless precautions are taken ahead of time. Precautions may take up to a decade to implement: We need to start now.

--- Precautions include drilling for more oil and natural gas in nations that are currently off-limits to private investment. (As oil goes up, so goes natural gas.)

--- Research, development and industrialization of unconventional oil reserves such as oil shale and tar sands need to be increased.

--- Restrictions on the siting of liquid natural gas (LNG) facilities need to be loosened. More terminals for LNG tankers need to be built, but where? Near seaside resort communities?

--- Fuel economy standards should be increased. Incentives need to be created for the purchase of hybrid electric vehicles. Plug-in hybrids - for better than 100 miles per gallon on gasoline - need serious consideration. Research into hydrogen fuel cell vehicles should progress.

--- Bioethanol (ethanol from a wide range of plant sources) needs more research and commercialization. Diesel fuels from coal using the Fisher-Tropsch method should be considered as should hydrogen generated from coal and from renewable sources such as solar and wind.

Among the knowledgeable participants in the Oil Shockwave event were:

--- Robert M. Gates, former Director of Central Intelligence

--- Richard N. Haass, former Director of Policy Planning at the Department of State

--- Don Nickles, former U.S. Senator

--- Carol Browner, former Administrator of the Environmental Protection Agency (EPA)

--- Gene B. Sperling, former National Economic Advisor

--- R. James Woolsey, former Director of Central Intelligence

--- Senator Richard Lugar (R-IN)

--- Senator Joe Lieberman (D-CT)

--- David Frowd, former Head of Royal Dutch/Shell Upstream Strategy and Planning Department

--- Rand Beers, former Special Assistant to the President and Senior Director for Combating Terrorism.

For the full Oil Shockwave scenario visit SAFE http://www.secureenergy.org/ and the NCEP http://www.energycommission.org/ .