Amy Jaffe of the Baker Institute, at America's Rice University in Texas, observes that in 1985 OPEC maintained about 15m bpd of spare capacity—about one-quarter of world demand at that time. In 1990, when Iraq invaded Kuwait, OPEC still had about 5.5m bpd of spare capacity (about 8% of world demand). That, argues Ms Jaffe, meant that the cartel could easily and quickly expand output to absorb several disruptions at once.
That is simply no longer true. Today's fast-shrinking spare capacity of about 2m bpd is less than 3% of demand—and it is entirely in Saudi hands.
Where has all that spare production capacity gone? General global growth in energy demand, but especially from China. Andy Xie of Morgan Stanley says demand in China is growing by leaps and bounds.
Surging oil demand for oil from China is the primary cause for the high oil price. Chinese demand is currently increasing three times as fast as the trend in 1990s. Global demand was rising by about one million barrels per day every year in the 1990s. Chinese demand is now rising at that speed by itself.
This rising Chinese demand for energy is causing the Chinese to make energy deals the world over. This creates both economic and security problems for the United States which US policymakers continue to steadfastly ignore.
Xie sees a decline in the rate of growth in Chinese demand as part of coming cooling off of China's economic growth. But in the longer term Chinese demand looks set to grow much higher than it is today. US energy policy and national security policy do not show signs that this trend has been internalized into policy calculations.
The Economist article reports on the possibility that Saudi Arabian oil production could be suddenly reduced by a well planned terrorist attack against Saudi Arabian oil facilities.
An even scarier possibility raised by Mr Baer is the crashing of a hijacked aeroplane into Abqaiq, the world's largest oil-processing complex. If done with the help of insiders, he speculates that the facility's throughput (nearly 7m bpd, on his estimate) would be choked off to as little as 1m bpd for two months—and might remain as low as 3m bpd for seven months.
Mr Woolsey adds that an attack using weapons of mass destruction (especially “dirty bombs”) would be even more devastating than one that used mere aeroplanes. All told, the pessimists reckon that well-co-ordinated attacks could take as much as 6m-7m bpd of Saudi output off the market for weeks, and perhaps longer.
The Mr. Baer mentioned in the excerpt above is the same Robert Baer who argues in a recent book that American policy makers have become conditioned to look too uncritically upon the risks of US dependence on Saudi oil.
The Saudis are currently producing about 8.6 million barrels per day (though estimates range as high as 10 million and they are supposedly increasing production rapidly) which is over 10% of the approximately 80 million barrels per day current worldwide daily oil production. Eric Chaney and Richard Berner of Morgan Stanley predict that if a terrorist attack on Saudi oil facilities reduced world production by 5% or 4 million barrels per day then oil prices would double until an economic slowdown and adjustments reduced demand.
A genuine supply disruption could spike energy quotes; as Eric Chaney and I recently noted, a loss of 5% of global crude output could double prices to $80 (see “Oil Price Update: Still Higher and More Uncertain,” Global Economic Forum, May 7, 2004).
In their "Oil Price Update" mentioned above Chaney and Berner say the spike in prices would not last because consumers would lose buying power and demand for energy would decline.
In one — our worst case scenario — serious political troubles in Saudi Arabia trigger a supply disruption. If the Kingdom is not able to play its marginal supplier-of-last-resort role in today’s taut market conditions, we might well re-visit price levels not seen since the second oil shock (USD 80 /bbl in 2004 dollars) before the transfer of income from oil consumers to producers chokes off global demand sufficiently to clear the market. At the other end of the spectrum, a second scenario involves an easing of political tensions in the Middle East, combined with a sharp slowdown in China that would send prices plummeting to the low twenties; we assume in this alternative that OPEC discipline would weaken if its members had to cope with a sudden loss of revenue and income.
But will such a successful attack against a major Saudi oil facility take place? The recent history of attacks in Saudi Arabia shows the terrorists are now shifting toward targetting foreign oil workers.
The latest strike at another oil company compound, following a similar attack on May 1 on the western Saudi town of Yanbu, seemed clearly intended as a new attempt to start an exodus of the thousands of workers on whom Saudi Arabia depends to keep its oil industry running.
The attack on Saturday hit at the core of the relationship between the West and the Saudi kingdom. Most of the oil production and the American and other Western technicians who keep it flowing are based in and around the urban centers of Khobar, Dammam and Dhahran, clustered together near the shores of the Persian Gulf, just across from Bahrain.
About 15,000 Americans and 10,000 Britons are believed to be residents in the Eastern Province, the largest concentration of foreigners in the country. The United States Embassy warned all Americans in April to leave the country.
Note that a lot of those people are the families of the oil workers. If the families move out the workers themselves could still stay and present a smaller and more easily defended set of targets. Some of the families might opt to move to Bahrain so that the workers could see them periodically without travelling too far.
"The heroic mujahedeen in the Jerusalem Squad were able, by the grace of God, to raid the locations of American companies ... specializing in oil and exploration activities and which are plundering the Muslims' resources, on Saturday morning," said the statement signed by "the Al-Qaeda Organization in the Arabian Peninsula."
"They have so far managed to kill or wound a number of crusaders, God's enemies. We will give details later, naming the heroes of our blessed squad," it said.
Local Saudi Al Qaeda leader Abdulaziz al-Muqrin has called for a war against Western oil company workers and the Saudi royal family. How successful will this terrorist guerrilla war be in reducing Saudi oil production? It is hard to predict this sort of thing. First of all, the attacks so far have been aimed at foreign workers rather than oil facilities. Why is that? Are the workers easier to target? Or do the attackers not want to damage their own country's oil fields? Do they simply want to deny to Westerners? Or is their real goal to cut revenue to the Saudi government in order to bring it down in a revolution?
The Saudis could reduce the size of the risks posed to the foreign workers by allowing the workers to work longer shifts and stay overnight in production facilities. This would reduce transit risks and risks from attacks in living quarters. Also, they could reduce the number of housing complexes that house foreigners and concentrate those complexes with more security around them. The workers could even have housing built for them right next to oil facilities and well away from populated areas. Siimilarly, office space for the oil industry could be built away from the cities and near the oil production facilities in more easily defended locations. Then access to the workers could be more easily controlled. The larger point here is that the Saudis can afford to greatly increase the security of the workers using a number of methods. Then to cut production Al Qaeda would need to shift to direct attacks on oil facilities.
As for whether Al Qaeda can actually bring down the House of Saud: There are obvious analogous situations in recent Arab history where radical Islamists tried to bring down a regime. It is worth noting that none have succeeded. For example, the Egyptian government successfully put down an Islamist insurgency in the 1990s. Though the violent phase in Egypt lasted for several years.
Political violence in Egypt reached a climax from 1992 to 1997 and then decreased steeply.25 During the period of clashes, government forces dislodged militant Islamists from their hiding places or confronted them while they were preaching in mosques. Thousands were arrested, wounded, or killed. Political assassinations became common. The government assassination of Ala’ Muhiel-Din, spokesman for al-Jama’a al-Islamiyya, in 1989 brought militant response in kind. Al-Jama’a al-Islamiyya claimed responsibility for a 1989 attempt to assassinate Interior Minister Zaki Badr, the 1990 assassination of Speaker of the People’s Assembly Ref’at Al-Mahjoub,26 the 1992 assassination of the secularist writer Farag Fouda, a 1993 attempt on the life of Nobel laureate Naguib Mahfouz, a 1995 attempt on the life of President Mubarak, and multiple attacks on Copts and foreign tourists, culminating in a massacre of some sixty tourists at the Hatshepsut Temple in Deir Al-Bahari near Luxor on November 17, 1997. The Jihad Organization was involved in multiple armed attacks, including three failed assassination attempts aimed at Information Minister Safwat Al-Sherif (April 1993), former interior minister Hassan Al-Alfy (August 1993), and former prime minister Atef Sidqi (December 1993). 27
Of course the big difference with Saudi Arabia is the world's dependence on its huge oil reserves. The rest of the world (excepting Western tourists in Egypt) was not much affected by internal Egyptian insurgency and counter-insurgency. But if political violence in Saudi Arabia lasts for several years it is quite possible that at some point during that time Al Qaeda will succeed in blowing up some Saudi oil facilities. If we are lucky the first damaging attack will be enough to wake us out of our slumber about energy policy but not big enough to bring on a deep recession and years of stagflation.
Oddly enough, the current on-going experience with insurgents in Iraq may be a reason for optimism about continued Saudi oil production. Iraq is far more chaotic and lawless than Saudi Arabia and yet Iraq is still managing to produce at approximately pre-war levels in spite of on-going attacks on oil facilities and pipelines.
Any expectation that the US occupation could quickly turn around the Iraqi oil industry, enabling it to influence or challenge Opec policy, has vanished. Output is currently at 2.8m barrels a day. The end of year target is 3m. By the end of 2005, the CPA is talking about 4m barrels a day, but no leading analysts takes this view seriously. One Seymour Pierce analyst said: “You can’t conjure a million barrels a day from nowhere.”
However, in the face of the violence and security risks oil production can't rise in Iraq until a much higher level of security is achieved.
In the Kirkuk field, oil output has been constrained by sabotage, reservoir damage, the theft of spare parts and repeated attacks against the 1.1-mil b/d capacity pipeline to the Turkish Mediterranean port of Ceyhan.
Since May 2003, there have been more than 100 attacks against the country's 4,350-mile-long pipeline system and 11,000-mile-long power grid. In early April, insurgents hit the oil pipeline from Kirkuk to the 110,000 b/d Daura refinery on the outskirts of Baghdad.
The biggest problem with Iraq is that the investment is not being made to scale production to much higher levels.
Given that both Saudi and Iraqi oil fields may be subject to terrorist attacks for years to come what should the United States do about it? The US should have an energy policy shaped much more strongly by national security considerations. A national security policy for energy should include an additional $10 billion or more per year spent on energy research as part of a recognition that the world's increasing dependence on Middle Eastern oil creates national risks for the United States.
One way that the higher security needed for oil field development might be achieved in at least some parts of Iraq would be to partition Iraq either formally or informally with a loosely coupled confederation. Let them self-govern and choose their own governments for each region. If we lower our sights for what is possible to achieve in Iraq we increase our chances of succeeding at what we actually try to do. Regional autonomy would increase the chances of success in each region. There are many obstacles to the achievement of democracy in an Iraq based on a highly centralized organization of government. Some (though not all) of those obstacles are avoided under a partition plan.
Regardless of whether partition brings better odds of success at democracy it may improve the odds of oil fields development. One region's government (perhaps the Shias or perhaps the Kurds) would be faster at establishing security and then in that region oil exploration will be able to take place most rapidly. The government of the Sunni region would have the most incentive to rapidly explore its region under a partition scheme since it would have the least amount of existing oil production capacity. If, given self-rule, the Sunni government opts to have nothing to do with American or British oil companies and decides to bring back Russian or French oil companies to explore for oil in their Western Desert then that will be their choice to make. The Kurds will be able to export oil by the pipeline that passes through Turkey while the Sunnis will be able to export using the pipeline that passes through Syria and the Shias will be able to export via their Persian Gulf oil terminals.
As this map of Iraq oil fields shows, with the exception of the East Baghdad oil field most Iraqi oil fields now in production are in the Kurdish north and the Shia south east. See also this map for a more detailed view of some of the fields but note that second map does not show the exact location of the East Baghdad field. Mismanagement of Iraq's oil fields in part due to UN sanctions probably will limit how much can be extracted from existing production fields. The poor extraction techniques which are damaging the fields have not yet stopped either.
While the maps above show that most oil fields in Iraq currently in production are located in Kurdish and Shia Arab regions there are some oil fields in the Sunni Arab region and there may be a lot of oil in the Sunni Arab Western Desert.
According to the Oil and Gas Journal, Iraq contains 115 billion barrels of proven oil reserves, the third largest in the world (behind Saudi Arabia and Canada). Estimates of Iraq's oil reserves and resources vary widely, however, given that only 10% or so of the country has been explored. Some analysts (the Baker Institute, Center for Global Energy Studies, the Federation of American Scientists, etc.) believe, for instance, that deep oil-bearing formations located mainly in the vast Western Desert region, for instance, could yield large additional oil resources (possibly another 100 billion barrels or more), but have not been explored. Other analysts, such as the US Geological Survey, are not as optimistic, with median estimates for additional oil reserves closer to 45 billion barrels.
Given that the Saudi oil fields look to be entering an extended period of risk of damage by Al Qaeda attackers the West and the world as a whole have an increasing need to get Iraq's oil fields on line as quickly as possible. Also, the United States needs to make a much larger effort to develop technologies that will obsolesce fossil fuel oil as an energy source. But in spite of rapidly growing oil demand, high oil prices, the continued terrorist threat, and worsening crisis in Iraq and Saudi Arabia neither major political party in the United States has embraced the need to make a big push to develop new energy technologies. Tell your friends, coworkers, Congresscritters, and even other bloggers: The United States needs a better energy policy.
Update: The Saudis stormed the Khobar residential compound where hostages were being held by the Muslim gunmen and the death toll is now around 22 people.
Saudi Arabia says 22 people, most of them foreigners, were killed in the day-long terrorist siege of a foreign housing complex in the Persian Gulf oil city of Khobar.
Saudi officials say the dead include eight Indians, three Philippine nationals and three Saudis. An American, three Britons, an Italian, a Swede, a South African and an Egyptian also were reported killed.
A death toll of 22 mostly non-Muslims will be seen by Al Qaeda as a victory since that is a large enough number to scare many non-Muslims into leaving.
It might seem obvious and practical to allow the foreigners to have guns inside their residential compounds. But my guess is that the Saudis will refuse to allow that because it would be an acknowledgement of limits to Saudi ability to prevent attacks and also could be portrayed by the Jihadists as the government allowing an armed "5th column" of non-Muslims inside the kingdom.
Abdul Salam al-Hakawati, a 38-year-old Lebanese corporate financial officer, said gunmen rummaging around his family residence said, "This is a Muslim house'' - apparently seeing framed Quranic verses on the walls.
He said a man in his early 20s, carrying a machine gun and wearing an ammunition belt, told him: "We only want to hurt Westerners and Americans. Can you tell us where we can find them here?''
Using attacks on personnel Al Qaeda probably will have better luck at reducing the rate of progress of new oil drilling projects than at slowing production of existing projects. But if Al Qaeda starts carrying out attacks on facilities and does so with sufficient expertise then it might manage to do damage that reduces current production.
Update II: Remember that the money the whole world spends to buy Saudi oil funds the spread of Wahhabism in the US and around the world. While the Bush Administration pretends (believes?) that all religions are inherently good the use of this myth to formulate policy is damaging to long term US national interests.
|Share |||By Randall Parker at 2004 May 29 10:56 PM Politics Grand Strategy|