Responding to a Terrorist Energy Crisis

This is a nice treatise on the effects of a terrorist attack against the flow of oil from the mid east and Indonesia. The possibility is real and quite possible and the effects disabling to oil users worldwide. Just yesterday the Somali pirates captured their biggest prize yet, a loaded mega tanker coming from the Gulf region. It will be interesting to see if the interdiction of one tanker will have a negative effect on oil prices.

FROM FRONTPAGEMAGAZINE.COM:
Responding to a Terrorist Energy Crisis

By William W. Beach, James Jay Carafano, Ph.D., Ariel Cohen, Ph.D., David Kreutzer, Ph.D. and Karen Cam
Heritage Foundation | 11/13/2008

In June 2008, The Heritage Foundation invited energy scholars and policy experts to participate in a computer simulation and gaming exercise assessing the economic effects of a global petroleum energy crisis. The exercise was similar to the previous energy study conducted from 2006 to 2007, but larger in geographic and economic scope.[1]
The Heritage team simulated the effects on world oil supplies, demand, and prices after a major terrorist attack on oil exports from Saudi Arabia and resulting disruption of oil shipping lanes between the Middle East and major Asian economies. Analysts at The Heritage Foundation's Kathryn and Shelby Cullom Davis Institute for International Studies developed the crisis scenario, while analysts in Heritage's Center for Data Analysis (CDA) measured the effects of these disruptions on the U.S. economy and found:
The price of petroleum in the U.S. spiked very quickly from the price of $127 per barrel on the day of the game to a high of $244 per barrel just days later.
This price increase caused a rapid slowing of the U.S. economy, seen in a drop in employment of approximately 1.5 million jobs in the first year and an average drop in inflation-adjusted gross domestic product (GDP) in the first year of $119 billion.
The scholars and policy experts recommended steps the U.S. and other countries could take to mitigate such adverse economic effects. CDA members analyzed these policy recommendations with the same economic model used to make the initial impact estimates. They found that:
Petroleum prices fell by 15 percent after implementation of the recommendations.
The U.S. economy recovered approximately 970,000 jobs in the first year and recovered $112 billion of output in the first year.
The results of this second game are described in detail in the following sections:
Situation and Strategic Environment
The Crisis Scenario
Conduct of the Game
Outcome Trends
Global Economic Effects
Lessons Learned and Conclusion
This project was a "proof-of-principle" investigation. It combined computer modeling and gaming to capture the economic impact of a sudden petroleum-supply disruption. By design, the magnitude of the disruption was to be catastrophic--well beyond what excess petroleum capacity and strategic petroleum reserves could easily absorb.
The purpose of the gaming exercise was to provide input data for an economic model to estimate net impacts of 1) the shock (the terrorist actions) and 2) the policy responses. As such, the study focused on the economic and diplomatic reactions of the player nations, and the subsequent implications. Military reactions by players were minimal. The exercise incorporated a plausible scenario that caused an immediate petroleum-supply interdiction of approximately 10 to 15 percent of global production, or 8 to 12 million barrels per day (mbd), with residual effects that would disrupt approximately 4 mbd for several months.
The project demonstrated the feasibility of modeling the economic consequences of crisis decision making and responses during an oil-price shock induced by a terrorist attack. At the same time, the game emphasizes that much more exploration is needed of how various combinations of political, military, diplomatic, and economic initiatives might affect the course of a global energy crisis. The Heritage Foundation plans to expand and refine its simulation and modeling tools to evaluate international responses, environmental consequences, and private- and public-sector responses to other foreign policy challenges.
Why This Exercise?
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