Fraters Libertas

The Soft Underbelly?

Iraq may well be the central front in the war against Islamist terror as the President claims, but neighboring Saudi Arabia could be the theater where the most critical battles are being and will be fought. And yes, it is all about oil as this article in the Economist on the possible impact of terrorist attacks on Saudi oil facilities demonstrates:

Oil traders report that fears of terrorist attacks that might disrupt Middle-Eastern oil exports may account for as much as $8 of the current per-barrel price. That may be because what was once unthinkable now seems possible, perhaps even inevitable: a major terrorist attack, or series of attacks, on oil facilities within Saudi Arabia.

While the Saudis don't command as large a share of the worldwide oil market as they once did, they still are the top dog. And it's not so much what they do today, but what they could do that makes their oil supplies so critical:

The Saudis not only export more oil than anyone else, but they also have more reserves than anyone else--by a long shot. Fully one-quarter of the world's proven reserves lie in Saudi Arabia. Four neighbours--Iran, Iraq, the United Arab Emirates and Kuwait--each have about one-tenth. Russia, Nigeria and Alaska put together do not match Saudi reserves.

Even more important is Saudi Arabia's role as swing producer. Unlike other countries, the Saudis keep several million barrels per day (bpd) of idle capacity on hand for emergencies. Today Saudi Arabia is the only country with much spare capacity available (see chart 1), though the precise amount is a matter of intense debate. Nansen Saleri, an official at Saudi Aramco, the country's state-owned oil company, will say only that Saudi output will rise in June to about 9m bpd, and that the country can raise its output above 10m bpd "rapidly".

Right now the Saudis are the only one with the ability to impact the price of world oil. They could step in and help ease the pain if oil exports from other OPEC countries were limited by political instability or conflict. But if something happened to the flow of Saudi oil, no one else could pick up the slack:

Amy Jaffe of the Baker Institute, at America's Rice University in Texas, observes that in 1985 OPEC maintained about 15m bpd of spare capacity--about one-quarter of world demand at that time. In 1990, when Iraq invaded Kuwait, OPEC still had about 5.5m bpd of spare capacity (about 8% of world demand). That, argues Ms Jaffe, meant that the cartel could easily and quickly expand output to absorb several disruptions at once.

That is simply no longer true. Today's fast-shrinking spare capacity of about 2m bpd is less than 3% of demand--and it is entirely in Saudi hands.

So how safe are the oil facilities in Saudi Arabia? Some are confident that they are relatively safe from serious attack:

Nawaf Obaid, an adviser to the Saudi royal family, argues in the latest issue of Jane's Intelligence Review that the risk of a successful attack on oil facilities remains "very low". He explains: "At any one time, there are up to 30,000 guards protecting the Kingdom's oil infrastructure, while high-technology surveillance and aircraft patrols are common at the most important facilities and anti-aircraft installations defend key locations." Mr Obaid claims that the Saudi government has added $750m over the past two years to its security budget (which totalled $5.5 billion last year, according to him) specifically to fortify the oil sector.

Kevin Rosser of Control Risks Group, a business-risk consultancy, agrees. He observes that there is plenty of redundancy built into the Saudi network--through multiple ports, pipelines and excess capacity--that should ease the blow from any attack. Besides, he insists, to do any real damage terrorists would have to hit bottlenecks, not just blow up random bits of pipeline.

Others are worried:

James Woolsey, a former head of America's Central Intelligence Agency, is unimpressed by talk of improved security: "Guards and fences are easy to put up, but they don't defend against the real threats." Trucks have to come in and out of facilities, he observes, and Aramco employees and security guards have to move about. He thinks that several attacks, if co-ordinated by terrorists who have infiltrated Aramco, could cripple the Saudi system.

How, exactly? Robert Baer, an intelligence expert, offers some suggestions in his disturbing recent book, "Sleeping with the Devil". He reckons that Ras Tanura, a port on the Gulf, is a vulnerable terrorist target. With an output of perhaps 4.5m bpd, this is the biggest oil-exporting port in the world. Mr Baer thinks a small submarine or a boat laden with explosives (as happened in October 2000 with the attack on the USS Cole off the coast of Yemen) could knock out much of Ras Tanura's output for weeks, or even longer.

An even scarier possibility raised by Mr Baer is the crashing of a hijacked aeroplane into Abqaiq, the world's largest oil-processing complex. If done with the help of insiders, he speculates that the facility's throughput (nearly 7m bpd, on his estimate) would be choked off to as little as 1m bpd for two months?and might remain as low as 3m bpd for seven months.

You have to figure that the Al Qaeda folks are well aware of these possibilities. The problem is that in the near term future there isn't much we can except try to protect the Saudi facilities, spoil planned Al Qaeda attacks by disrupting their network in Saudi Arabia, and hope to hell that they are not able to succeed in interrupting the flow of oil:

A witch's brew of soaring oil demand, private-sector destocking and lack of investment in new production capacity by OPEC has left the world with an extraordinarily tight oil market today. There is less spare capacity than at almost any point in the past 30 years. As Edward Morse, an energy expert at HETCO, an oil-trading firm, puts it: "The world has been living off surplus capacity built a generation ago, and thought it could get by. It turns out not to be the case." Building a new surplus will inevitably take a long time. Until then, the potential instability of Saudi Arabia's oil supply will remain a strategic weakness for the world economy.

There has been speculation that Al Qaeda would try to follow up their apparent success in influencing the outcome of the Spanish election through the train bombings in Madrid with an attack in the United States designed to achieve similar results. The conventional wisdom is that such an attack would probably help President Bush more than hurt him, with the American people rallying around their president.

A far more prudent way for Al Qaeda to influence the outcome of the election would be to seriously disrupt Saudi oil production. Sharp increases in oil prices would put a brake on the economic recovery, cause sticker shock at the pump for consumers (can you imagine the whining if gas were to top $3 a gallon?), and lead even more Americans to question the wisdom of the war in Iraq. The media would be screaming that if we hadn't attacked Iraq, the Saudi oil facilities wouldn't have been attacked, and gas would still be cheap.

Can you say President Kerry?