With oil playing such an important role in transportation, energy, and manufacturing worldwide, supply disruptions pose a serious threat to the global economy and political stability. Earlier this year, the Herzliya Conference convened a group of experts and practitioners from a range of specialties around the world to participate in a war-game that examined a possible oil-shortage scenario: a global oil crisis initiated by a terrorist attack on the Saudi Arabian Abqaiq oil facility. Under the conditions of the simulation six million barrels of oil per day were removed from global markets, resulting in a shortage of millions of barrels per day over a prolonged period in which no spare capacity was available from other producers.
The conference found that the immediate outcome of the sustained shortage of oil supply would be a considerable spike in global oil prices, which could reach USD200 per barrel. This would serve to plunge the global economy into a recession and destabilize the Middle East. Participants recommended reducing dependencies on oil at large and on Saudi oil reserves specifically and enhancing global preparedness and policy awareness, and enlarging the membership scope of the IEA to include large economies like China and India.
What type of impact would such a scenario have on the United States? What can the United States do to safeguard against this type of incident? If an international effort is needed to protect global markets from a similar oil crisis, what can the U.S. do to move in that direction?
There are no silver bullets in reducing one of the world’s largest per capita petroleum user countries. The Administration’s move to increase mileage standards significantly (54.5 mpg average by 2025) will have a long term (not short term) impact, cutting US oil imports in half, State and local mass transit, use of bicycle lanes, and “walkable communities will also have long term impact, cutting oil imports by more than a third. Boone Pickens push to use domestic natural gas to fuel heavy duty trucks which use 3 million barrels of oil per day, could cut the rest. Add electric vehicles, plug-in hybrids, and biofuels, all moving upward – the US could cut oil imports for transportation. The only challenge standing in the way is partisanship. The entire aforementioned portfolio needs to be pushed as fast as possible and will have solid and profound national security, economic, and environmental impacts.
“The only challenge standing in the way is partisanship.” That’s a bit like saying the only thing standing in the way of pigs flying is physics.
Congress may well deserve to be considered “the broken branch.” But the reason is not so much partisanship as ideological polarization, as both parties have become hostage to more extreme factions.
The US constitutional system was designed to temper extremism by requiring competing factions to compromise. The unwillingness to compromise gridlocks the process. Or, if one party becomes dominant, it tends to produce radical policies that usually turn out to be counterproductive and socially divisive.
Still, it’s not so clear how much the flaws of the US political system are a barrier to the sorts of energy policies Sklar prefers. Partisanship is hardly an issue in China’s one-party oligarchy. Yet while China showcases generally inefficient ‘green’ initiatives, its demand for petroleum and other conventional energy resources seems voracious.
The fact remains that alternatives to established energy systems are for the most part more costly. And transforming energy systems entails further costs.
It’s fair to question how realistic the Herzliya scenario was. While Saudi Arabia may well be vulnerable to attack by advanced Iranian weapons in a wartime scenario, a terrorist attach that could have a major effect on Saudi petroleum facilities would be very hard to mount without being detected and countered.
During the 1980s, Iran and Iraq — the next two biggest oil suppliers in the region — fought an intense, 8-year war that threatened both production and oil shipping through the Persian Gulf. While oil prices spiked for a while, they then declined sharply and remained low until 2001: http://j.mp/PPn2Sw
And that was after reducing oil production from those two countries by over 6 million bbl/day.
Sklar is right that planned increases in CAFE standards would not respond to an oil supply crisis in the near term. Pickens’ idea of converting US truck and bus fleets to natural gas has some merit, and eventually could reduce a significant share of US petroleum demand. But the conversion and infrastructure costs in money and time are not trivial. Pushing electric, plug-in hybrid, and hybrid vehicles, which generally is generally not cost-effective, and certainly would not be responsive to a supply crisis.
The one measure that could make a substantial difference in balancing demand with a potential fuel supply interruption is telework. The infrastructure needed to implement it is generally available. And numerous studies show that the potential for telework is greatly under-utilized by most private and public employers.
I wish I could give a pleasant answer, but we are in a grim situation with little sign of it getting better. What matters for the US is really the OECD situation as a whole, since we are sensible enough to maintain trade with OECD partners (and beyond); that’s where the B rent world oil price kicks in. We have solid knowledge that the short-term elasticity of demand for gasoline in transportation (anything short of buying a new car!) is -.2; at that rate, to accomodate, say, a 20% reduction in crude oil supply, gasoline prices would have to rise about 70%. Of course, higher prices could allocate the pain, but the outflow of money from OECD nations would be in the trillion dollar range, and enough to push
a world economy which is already teetering on the edge over the line. In fact, many believe that the big 2008 economic collapse we have yet to recover from would not have happened, were it not for all the simultaneous mortgage defaults caused by the rise of the price of gasoline back then.
With an oil monopoly in fueling cars, and a -0.2 elasticity for driving, I worry very much whether we will reduce the vulnerability before it is too late. Substitution and competition are the most plausible and fastest remedies in my view. Electric and plug-in cars (and even high mpg hybrids) are an essential part of the long-term picture, but even if we move much faster on them (as we should, in my personal view), it will take a long time before 20% of the new cars are PHEV, and another 15 years to turn over the fleet. For a QUICK reduction in vulnerability, our best hope would be the Open Fuel Standard bill
(wwww.openfuelstandard.org); after all, Brazil shifted from oil-only new cars to >50% gasoline/ethanol flexibility in only just over a year, and we certainly have the ability to do likewise (though GEM60 flexibility, which allows up to 60% methanol, would be just as easy and much better for competition and efficiency).
Actually, I work as an electrical engineer, and serve on the IEEE Energy Policy Committee — but I believe I was the first to propose an Open Fuel Standard bill, back in 2003. The idea came to mind after I heard a two-hour presentation from a guy from the Persian Gulf oil community, giving their view of how things will unroll in the future… and that really did concentrate the mind. If we grope for what we could do relatively fast that would really matter, open fuel standard — AND associated measures (like encouragement of flexibility in gas stations too, and replacement of renewable fuel standards with the RIGHT kind of Low Carbon Fuel Standards) — would be far more effective than anything else at hand. Obama’s new mpg standards do also help a lot, but all else is peanuts.
It amazes me that a nation so much at risk for its very survival can drag its feet on these matters.