Simulation Highlights Economic Vulnerabilities of Oil Dependency

26 June 2005

Oil ShockWave was a scenario exercise developed by Securing America’s Future Energy (SAFE) and the National Commission on Energy Policy. In this half-day exercise, a bipartisan panel of intelligence, military, and energy experts took part in a series of simulated Cabinet meetings over a projected seven-month period to advise the President on how to respond to disruptions in the global oil supply.

The premise is that a series of geopolitical (terrorist attacks, political unrest) and natural (cold winter) factors combine to remove 3.5 million barrels per day of supply from the market.

As a result, the price of oil climbs to more than $160 per barrel and more than 2 million jobs are lost, among other unpleasant outcomes: • Gasoline prices of$5.74 per gallon;

• Global oil price of $161 per barrel; • Heating oil prices of$5.14 per gallon;

• Fall of gross domestic product for two consecutive quarters;

• Drop in consumer confidence by 30 percent;

• Spike in the consumer price index to 12.6 percent;

• Ballooning of the current accounts deficit to $1.087 trillion; • Decline of 28 percent in the S&P 500; • Aggressive pressure on the U.S. from China to end arm sales to Taiwan, and; • Demands from Saudi Arabia for changes to U.S. policy regarding the Mid-East peace process. Participants included: • Robert M. Gates, former Director of Central Intelligence; • Richard N. Haass, former Director of Policy Planning at the Department of State; • General P.X. Kelley, USMC (Ret.), former Commandant of the Marine Corps, member of the Joint Chiefs of Staff; • Don Nickles, former U.S. Senator; • Carol Browner, former Administrator of the Environmental Protection Agency; • Gene B. Sperling, former National Economic Advisor; • Linda Stuntz, former Deputy Secretary of Energy; • Frank Kramer, former Assistant Secretary of Defense for International Security Affairs; • R. James Woolsey, former Director of Central Intelligence. Other key findings from the group: • Once oil supply disruptions occur, there is little that can be done in the short term to protect the U.S. economy from its impacts, including gasoline above$5/gallon and a sharp decline in economic growth potentially leading into a recession.

• There are a number of supply and demand-side policy options available that would significantly improve U.S. oil security. Benefits from these measures will take a decade or more to mature, and thus should be enacted as soon as possible.

• Supply-side measures include promoting developing of conventional oil reserves in nations currently off limits to private investment through enhanced U.S. diplomacy, increase research and development into extraction of unconventional oil reserves such as oil shale and tar sands, and enable siting of new liquid natural gas and other energy facilities.

• Demand-side measures include promoting energy efficient passenger vehicles with incentives for hybrid electric vehicles, strengthen fuel economy standards, and increase research and development into plug-in hybrids and hydrogen fuel cell vehicles.

• Alternative fuel measures include increased research and development that enable ethanol production from plant materials, Fischer-Tropsch diesel from domestic coal, and hydrogen from coal and eventually from renewable sources.

Scenario-based planning can be extremely useful; Royal Dutch Shell, for one, has taken it to a bit of an art form. (Not that it has helped them avoid some of the unpleasant surprises of the past few years.)

But while this scenario exercise put forward plausible short-term disruptions to oil supply, it doesn’t seem to have dealt head-on with the longer-term, inexorable impact of peak oil production.

In some ways, this scenario seems like a replay of the 1970s and 1980s—external events cause a supply disruption. Given the tightness of the market, it is a particularly nasty disruption, but the scenario reflects it as more of a temporary state, than a permanent—and worsening—condition.

Nevertheless, any high-level Washington exercise that focuses on the importance of urgent attention to the demand-side (efficiency, conservation, plug-in hybrids and so on) is valuable (and, sadly, rare). That plug-ins were noted as a key technology is also encouraging, although Woolsey has been promoting plug-ins as a needed solution for awhile now.

I think the big question for many of us at this point is, "How bad will it be?" Will this mean a dark age, panic and the near-extinction of the species, as claimed on some websites, or will it be a more orderly decline of the USA into a traditional oligarchy, with a wealthy minority driving and the rest either bicycling or walking? Or something else?

Bushit will fiddle while the rest of us starve and freeze.

Our "government" should have funded research into alternative fuels like Alcohol and BioDiesel, since before we attacked Iraq to steal their oil.

They threw a few million towards Hydrogen but I suspect my Great-great-grand children "might" get to see mobile Hydrogen.

We need it today.

Bushit will fiddle while the rest of us starve and freeze.

Our "government" should have funded research into alternative fuels like Alcohol and BioDiesel, since before we attacked Iraq to steal their oil.

They threw a few million towards Hydrogen but I suspect my Great-great-grand children "might" get to see mobile Hydrogen.

We need it today.

"with a wealthy minority driving and the rest either bicycling or walking?"

Throw in 'or using public transportation' and I'm all for it, given a slow enough transition. It's "unfair" that the wealthy have opportunities that others don't, but so long as a resource is scarce, why not raise the cost/tax and limit it to a few users?

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