The Real Oil Threat

Drilling in the Gulf was shut down for nearly a year, and is still largely shut down because it’s difficult to get drilling permits. Drilling on the outer-continental shelf remains largely shut down. And don’t mention drilling in ANWR to this administration.

But what is the real threat? It’s not drilling in the Gulf or in the outer continental shelf.

In fact, more drilling would lessen the real threat – a cut-off in foreign oil supplies.

Currently there is talk about the Suez Canal or the Strait of Bab-el-Mandeb leading to the Red Sea and Suez being closed to oil tankers due to the turmoil in the Middle East. This, however isn’t a serious threat. Tankers would merely be rerouted around South Africa. This would add about twelve days to the time it takes to transport oil to the United States, which would lock up large quantities of oil in tankers on the high-seas. An increase in floating inventory and transportation costs would add slightly to the cost of oil, but not result in a cut-off of oil.

The same is true with respect to the Malacca Straits, which tankers pass through on their way to the Far East, China and Japan.

If necessary, our strategic petroleum reserve could make up for any delay caused by rerouting tankers around South Africa.

The strategic petroleum reserve (SPR) is extremely important and shouldn’t be used unless there is a real interruption to oil supplies. The larger the strategic petroleum reserve, the better prepared we are for an interruption to oil supplies. The more oil we produce in the United States, the better our ability to withstand an interruption to our oil supplies.

The SPR holds 727 million barrels of oil, equal to a little over two months of oil imports. The less oil we import due to increased production in the United States, the longer the SPR will last in an emergency.

Occasionally an oil producing nation will threaten to cut production or limit exports, or revolutionary actions, such as in Libya, result in small reductions in the world’s oil supply. These short-term disruptions to the market usually result in temporarily higher oil prices. Fear, rather than facts, feeds higher prices.

But the real threat for an interruption to oil supplies is what can happen in the Arabian Gulf or in Saudi Arabia. The fear of these threats are the real reason oil prices have spiked, and not the loss of 2 million barrels per day of Libyan light crude.

It should be noted that inflation of the U.S. dollar also affects oil prices since oil is denominated in dollars. A weaker dollar can cause higher prices since the sellers of oil want to maintain their purchasing power.

So what are the three greatest threats to an interruption in oil supplies?

The threat that could have the greatest impact is closure of the Strait of Hormuz. Nearly 25% of the world’s oil is transported through the Strait of Hormuz. At its narrowest point, the strait is about thirty miles wide. Blowing up one or two tankers by terrorists would raise insurance rates and the price of oil, but it wouldn’t seriously affect the flow of oil.

Iran would have to risk war to block the Strait of Hormuz, which means that blocking the strait has the lowest probability of the three worst scenarios.

It is, however, Iran’s trump card, and could be played at anytime.

An uprising by Shia in the Eastern province of Saudi Arabia would have the next greatest impact on world oil supplies. All of Saudi Arabia’s oil is produced in the Eastern Province where Shia comprise most of the population. They have been treated harshly by the Sunni who rule Saudi Arabia. Iran’s population is also Shia, as is the majority of the population of Bahrain, so that Iran can command some allegiance form the Shia living in Saudi Arabia and Bahrain.

The recent disturbances in Bahrain had support from Iran. Bahrain is connected to Saudi Arabia by a causeway, so dissent in Bahrain increased the threat to Saudi Arabia. This is one reason why Saudi Arabia put down the demonstrations in Bahrain.

The situation in Saudi Arabia, however, remains somewhat unpredictable.

The third threat to an interruption in the world’s oil supply is a successful terrorist attack on the oil processing facility at Abqaiq, in Saudi Arabia. Nearly all of Saudi oil is processed through this facility to remove volatiles and hydrogen sulfide.

A terrorist attack on Abqaiq failed about two years ago. If it had succeeded and severely damaged the facility, it would have cut the world’s oil supply by about 10%.

Depending on the damage done to the facility, it could take a year to restore the facility at Abqaiq.

Abqaiq is also vulnerable to a missile attack. It’s about 100 miles from Iran, 500 miles from Yemen and 1,000 miles from Syria and Somalia.

Iranian designed solid fuel missiles can reach over 1,000 miles. A clandestinely armed terrorist organization would have the potential to reach Abqaiq with a missile, though this is still only a remote possibility.

It’s interesting to note that disturbances in Yemen and Egypt could end up helping Iran encircle Saudi Arabia.

We can help reduce the impact of any interruption to oil supplies by drilling and producing more oil in the United States and by improving Canada’s ability to ship oil to us.

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