The “Oil Shockwave” project: well-funded analysis of the obvious
Summary: The world’s slide towards Peak Oil continues, marked by much chattering but little research. The few well-funded research projects focus not on understanding the dynamics of Peak Oil, but on political objectives. The Oil Shockwave project nicely demonstrates this. Imagine what we might have learned if this money had been spent on actual research, instead of this stunt. At the end is a recommendation on a better way to consider these problems.
The Oil Shockwave 2007 Project
In 2005, Securing America’s Energy Future (SAFE) introduced Oil ShockWave, a groundbreaking simulation exercise that examines the potential consequences of U.S. oil dependence by bringing former senior government officials together into a fictional Cabinet that is forced to contend with a series of international events resulting in a rapid and sustained increase in the price of oil.
Since then, simulations have been held around the country and the world, including the 2006 World Economic Forum Annual Meeting in Davos, Switzerland, and the Aspen Strategy Group’s 2007 Summer Session in Aspen, Colorado. With each event, the simulation scenarios are updated and refined to reflect the most current and realistic challenges. But through each Oil ShockWave, participants have remained consistent in their conclusions: oil dependence represents a grave national and economic security threat to the United States.
Segment 1 of the scenario: instability in the Caspian — May 4, 2009
- The outbreak of violence in Azerbaijan, a key Caspian Sea oil producer, sends a shiver through an already tight global oil market.
- An explosion in Baku has temporarily disrupted the operation of a key regional oil artery, and more violence is anticipated.
- With global spare production capacity already below 2.0 million barrels per day, the possibility of unrest in a major oil producing region sends oil prices up to $115 per barrel.
Later the president’s advisors are interrupted by breaking news…
- The sudden spike in oil prices is leading to speculation of financial turmoil on Wall Street.
- Hedge funds are reporting major losses, the stock market is down several hundred points.
- Retail gasoline prices are expected to climb to well over $4.00 per gallon.
June –July 2009
- Continued violence in Nigeria causes Western oil companies to shut-in an additional 500,000 b/d of production.
- Inspectors from the International Atomic Energy Agency discover an undeclared nuclear facility in Iran, causing tensions to rise.
- Scientists predict that the peak months of Atlantic hurricane season will be highly active.
Segment 2 — August 7, 2009
- With tensions rising over its nuclear program and the threat of harsh international sanctions growing increasingly real, the government in Iran suspends nearly 10 percent of daily oil exports.
- Later, Venezuela joins the limited embargo.
- The combined actions of Iran and Venezuela remove 700,000 barrels each day from an already jittery oil market and send crude prices soaring to unprecedented levels.
The president’s advisors are once again interrupted by breaking news…
- The government of Venezuela has announced its intention to match the Iranian oil embargo, bringing the total amount of oil withheld from global markets to 700,000 barrels each day.
- The news significantly accelerates the upward climb of crude oil prices.
The economic impact of $165 oil
To analyze the impact of $165 oil, SAFE commissioned The Interindustry Forecasting Project at the University of Maryland (Inforum) and Keybridge Research llc. Using the well-respected LIFT Model, an interindustry macroeconomic model of the U.S. economy, researchers were able to provide some detailed characteristics of the potential economic impact of the events depicted in Oil ShockWave.
A thought about this….
Serious and simultaneous problems in Azerbaijan, Nigeria, Iran, and Venezuela — plus hurricanes — would be bad! A sudden increase of oil prices to $165 would be bad!
Thank you SAFE for this brilliant insight. Of all the things that could be studied about energy, is this the most pressing in terms of value added?
This is but one of many possible “shockwaves”: low-probablilty but high-impact scenarios. Studying them individually tells us little, as the correct public policy response is “so what?” Shockwave analysis is useful only with analysis of the scenario’s impact AND probability. Otherwise these are just nightmares.
Today analysis of shockwaves is done almost exclusively by special interest groups (often academic or non-profits). Wwe allocate resources to shockwave scenarios based on several factors:
- the group’s access to elite opinion,
- the group’s ability to raise funds,
- their degree to which their shockwave resonates with the public.
Many studies have shown the people have little grasp of these kind of issue, and less understanding of the relevant statistics (probability and risk). There is a better way to do this. Allocation of our limited resources towards these require sketching out (as best as can be done) the full universe of such dangers.
A modest suggestion
Commission a group to collect as many shockwave scenarios as possible, with a brief analysis of each. Fortunately there are thousands of interest groups willing to pitch in and help! Then apply a common analytical framework to rate them on both dimensions: probability and impact. The results would prove quite interesting, and allow more rational public policy discussion.
For more information about Peak Oil
- When will global oil production peak? Here is the answer! (1 November 2008)
- The most dangerous form of Peak Oil (8 April 2008)
- The world changed last week, with no headlines to mark the news (25 April 2008)
- Peak Oil Doomsters debunked, end of civilization called off (8 May 2008)
Here is an archive of my articles about Peak Oil.
Here are other resources about Peak Oil.