Tuesday, February 06, 2007

Playing it S.A.F.E. 

The other day I did a post on the illuminating Senate testimony of Robert Hormats. As he mentioned in that testimony he is a member of the Energy Leadership Council of Securing America's Energy Future (S.A.F.E.) which is a rather interesting group.

Just as Mr. Hormats alluded to in his testimony this group sees energy security (and by that they mean access to needed oil supplies) as a very important foreign policy and military matter. In fact, it bares noting that 8 out of their 16 directors come straight out of the Pentagon. That surely is no coincidence.

Their web-site contains a wealth of information regarding the world oil industry and world oil consumption in addition to studies on how the oil markets work.

For example this primer Fundamentals of the Oil Market gives a good explanation of the “Demand Inelasticity” (page 2). It is that “Demand Inelasticity” which means that small changes in supply can create large changes in price that allows the OPEC cartel to be successful by using small cutbacks in output to boost prices and OPEC income tremendously. Although the opposition always likes to belittle Chavez’s intelligence (given that they can’t win an election to save their lives I guess belittling others is all that is left to them) he has understood this from day one – whereas the vast majority of the opposition has never grasped that concept.

Another working paper is entitled: “Oil Dependence: A Threat to U.S.Economic & National Security”. It is worth quoting a couple lines from the executive summary:

America’s Oil Dependence
Oil is the lifeblood of the American economy, providing more than 40 percent of all energy consumed in the United States and 97 percent of the energy used for transportation.

Increasing Reliance on the Middle East
The world will increasingly depend on the Middle East OPEC nations to supply the oil needed to meet future demand – which is expected to grow to 110 million barrels per day (mbd) by 2025.

A National Imperative
Oil dependence endangers U.S. economic and national security. In addition to hundreds of billions of dollars each year in direct costs, oil dependence feeds the growth of Islamic terrorism; provides vast amounts of money to unstable, undemocratic governments; increases the likelihood of international conflict; puts American troops in harm’s way; and exposes Americans to the risk of severe economic dislocation.


Oil’s influence on U.S. foreign policy puts considerable leverage in the hands of hostile powers and undemocratic regimes and weakens our capacity to prevail in the war on terrorism.

Growing deman for oil could heighten geopolitical tensions and spark international conflict.

Transfers of national wealth to foreign oil producers account for approximately one-third of the U.S. current account deficit, which soared to $792 billion in 2005.

I particulary like the “puts American troops in harm’s way” part. They wouldn’t be implying that all the troops in “harms way” in Iraq are there for any reasons having to do with oil are they? Nahhh, must have been a typo. Regardless, this clearly shows how central oil is to U.S. foreign and military policy.

I recommend that people read this report for themselves (it is only 9 pages long). But for those who don’t here is one more gem:

Military Cost and Risk

The need to secure global oil supplies requires substantial defense expenditures and involves risks to American forces – none of which are factored into the market price of a barrel of oil.

- CENTCOM troops ensure “unfettered access” to oil supplies in the Middle East.
- SOUTHCOM troops defend Colombia’s Cano Limon pipeline.
- EUCOM soldiers are training locals to guard the Baku-Tbilisi-Ceyhan pipeline and working to curb corruption and improve the security of facilities in West Africa.
- PACOM ships and planes patrol tanker routes in the Indian Ocean, the South China Sea, and the Western Pacific.

Another almost must read report is the summary of the “Oil Shockwave” crisis simulation. In this exercise former high ranking government officials played the role of different government officials and tried to react to different events such as attacks on oil facilities and the loss of Nigerian oil. The take away finding of this report: “Even among individuals who have spent years contending with security and energy issues, it was surprising to learn the extent to which seemingly small disruptions in world oil supplies could inflict serious economic damage and alter the global security environment….[T]he economic and national security risks of our dependence on oil – and especially foreign oil-have reached unprecedented levels. The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government."

One interesting little finding from this simulation is that a shortfall in the world oil supply of only 4 percent would lead to a 177% increase in the price of oil (from $58 to $161 per barrel)(page 7). If that doesn’t convince someone of the “inelastic demand” that oil has I don’t know what will.

And before you dismiss this as some little play game by a bunch of has-beens want to guess who played the part of National Security Advisor? Robert Gates. Name doesn’t ring a bell? Well, his new job is Secretary of Defense of the United States. What was his lesson learned from this simulation?

“The real lesson here is that it only requires a relatively small amount of oil to be taken out of the system to have huge economic and security implications."

Again, I encourage people to do a lot of reading with these documents. There is a wealth of information in them. And what should our take away lesson be from what is in these documents? Simple. For the U.S. the fight over oil is a fight for its ability to remian supreme. As much as things may be going against them from Iraq to Venezuela they aren’t about to give up. They know they have too much depending on the outcome of the oil wars.


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