By Kenneth Martin

Gasoline is $4.75 a gallon

Simulated Oil Crisis Raises Eyebrows

Friday, June 24, 2005

WASHINGTON — With Congress poised to finally turn out an energy bill, a group of former officials from both parties and the intelligence community gathered in Washington Thursday to demonstrate how the world is flirting with disaster on energy.

The message in the exercise: If consumers don't like spending $2 per gallon for gasoline, they will probably like $5 per gallon even less.

In a sobering reminder of the need for a long-term energy strategy, a nonpartisan group forming the National Commission on Energy Policy held a simulated National Security Council meeting to grapple with a frightening sequence of events.

In this exercise, Nigeria (search), the fifth-largest oil supplier to the United States, suffers violent political unrest in December 2005 and U.S. oil companies evacuate, pulling 600,000 barrels a day off the global market.

"As many of you know, this unrest in Nigeria could have a significant impact on the supply and price of oil," said former CIA Director Robert Gates, one of the participants in the simulation.

At about the same time, a very hard winter prompts a large increase in demand.

"The cold weather, that could add another 700,000 barrels a day to daily oil demand worldwide," said former Royal Dutch/Shell Group official David Frowd, another participant

With those two events, the world suddenly develops a 2 million barrel per day shortfall.

In the scenario, President Bush's advisers consider releasing oil from the Strategic Petroleum Reserve but decide the 90-day supply should be saved in case things get worse.

Another option, one the United States recently exercised in real life, is to implore the Saudis to pump more oil. During this exercise, the Saudis have some conditions: first, stop pressuring them to democratize.

The second, said former State Department Policy Planning Director Richard Haass, "is to stop discussing and stop investigating allegations that they're involved in money laundering and giving funds to Al Qaeda (search)."

As much as the oil is needed, officials reject the conditions.

It is "essentially unacceptable that we would give the Saudis a free pass on what's going on inside their country," Haass explained.

In the simulation, oil prices rise to $82 per barrel and gasoline is $3.31 per gallon.

On top of it all, a few weeks later terrorists strike oil and gas installations in Saudi Arabia as part of a major terrorist attack. Damage is limited but another 250,000 barrels a day are lost to the markets.

Oil shoots to $97 a barrel; gasoline leaps to $4.05 per gallon. But that's not all in this exercise.

Following up on Usama bin Laden's (search) promise to attack the U.S. economy, terrorists hijack a tanker and crash it into one of America's key oil facilities, setting most of the Valdez, Alaska, port on fire.

"Valdez ships about 1 million barrels per day, down largely to the West Coast," said former CIA Director James Woolsey.

In this scenario, the price of crude goes to $123 a barrel and gasoline is $4.75 a gallon. The economy staggers, consumer spending drops by almost a third and 850,000 jobs are lost. Think it's impossible? The experts say it's not.

"What this exercise revealed is that very modest disruptions in oil supply, whether they're here at home or abroad, can have truly devastating impacts on our nation's economy and on our overall security," said the commission's executive director Jason Grumet.

"I think there is a general misunderstanding of just how vulnerable we are to small disruptions because the world oil market is so tight right now that any little interruption can have a very serious and undermining effect," he said.

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