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The “Oil Shockwave” project: well-funded analysis of the obvious

10 April 2008

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:

  1. the group’s access to elite opinion,
  2. the group’s ability to raise funds,
  3. 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

  1. When will global oil production peak? Here is the answer! (1 November 2008)
  2. The most dangerous form of Peak Oil  (8 April 2008)
  3. The world changed last week, with no headlines to mark the news   (25 April 2008)
  4. 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.

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7 Comments leave one →
  1. 10 April 2008 12:48 am

    I believe the geological findings of the Bakken formation will be published in two days. It appeared to me as if some people expect a 2nd Kuwait there (under U.S. soil). So maybe let’s wait for two more days…
    .
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    Fabius Maximus replies: I have made a brief post about this: Euphoria about the Bakken Formation.

  2. 10 April 2008 5:11 am

    I think one of the things blogs would naturally good at doing is coming up with a research agenda, questions that need answering, so money doesn’t get wasted on silly stuff. I get first question:

    under what circumstances are oil-producing nations likely to clamp down on exports? are the important variables systemic (oil prices or whatever) or internal (terrorism, leadership, domestic economy, etc.)? are there any good historical precedents to study? what leverage do the U.S. or other oil-consuming countries have to keep oil-exporting countries in the global market?
    .
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    Fabius Maximus replies: All good questions. The first and simple answer is: after they have paid their bills, any excess production is a question of greater risk-adjusted future value:1. Pump oil, sell it, invest the money. Or…
    2. Leave it in the ground, to be sold at a higher price by future generations.

    Note #1 allows the possibility of fleeing with the money in the event of regime change.

  3. OldSkeptic permalink
    10 April 2008 9:18 am

    There is another issue as well. ‘Peak Oil” refers to 2 things:

    (1)The physical limits to oil production caused by reserve depeletion.
    (2)The export limits of producer countries.

    Now there is some debate about (1), some have us at that point now, other a few years ahead. The debate has shifted, with the idea that the peak is 20-40 years off being discounted now.

    But (2) is real and now a major issue. Basically as oil producing countries own standard of living has increased their consuption of their own oil (and gas) has grown, reducing the amount available for export. Look at the BP energy statistical data (google it and get the Excel spreadsheet) and look at the increase in oil/gas consumption in the producer countries themselves.

    Even if you believe that we are not at the peak in terms of production we are at the peak (or are past it) for the peak in oil/gas available on the market. Added to this is the locking up of supplies, by many countries entering into long term supply contracts, reducing the amount available on the open market.

    Iran is a good case in point. There is a very good reason why they are going for nuclear power as on persent trends they will not have any spare gas (and possibly oil) to export within a short period of time, even though their actual production may not drop. A smart person would help their nuclear industry and offer other energy technology as well (e.g. solar).

    Now there are only 3 ways to deal with this:
    (1) The oil importing nations have to develop alternative energy and transport capabilities.
    (2) The oil exporting nations have to develop alternative energy and transport capabilities to free up more of their production for export.
    (3) We drop the living standards of the oil producing countries populations, so that there is more for export to the importers (the Iraq option).
    (4)The standards of living (and hence energy use) for the importing nations drops markedly.

    A cynic would say that the current US strategy is (3), (and some others e.g UK, with the EU having bet on (1) as well) . A cynic would also say that the total destruction of the Iraq society and economy was not just a stuff up but was a well considered plan. A cynic would also say that this is a model that some want to extend to other oil producers, such as Iran.

    Now I propose that a smart person would follow (1) and then export the technology to the exporters for them to do (2), maintaining oil/gas production and reserves for future generations. A stupid person would try (3) and then inevitably experience (4), which seems to be a reasonable summary of exactly where we are right now.
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    Fabius Maximus replies: We sppear to have chosen (5) — close our eyes to the danger and shout “ya, ya, ya.”

  4. plato's cave permalink
    10 April 2008 8:58 pm

    OS — I have a fifth scenario, a muddled one, but the one I imagine was in the minds of the neo-cons: destroy Iraqi physical and political infrastructure so that western companies could eventually step in and control Iraqi oil. Aside from the familiar strategic ones, this would have multiple benefits, including halting (temporarily) the drift to selling oil in euros; disrupting global supplies and allowing western companies to make unprecedented profits from rising prices. (The latter is well documented as a pattern over the past 40 years, by the studies of Jonathan Nitzan and Shimson Bichler of the University of Toronto.)

  5. OldSkeptic permalink
    11 April 2008 9:36 am

    Digressing (or really expanding the argument a bit) I’m continually amazed at some of the arguments “against” energy saving/alternative energy. Over and over again we get the ‘it will collapse the economy, everyone will become poor’. This is total nonsense.

    Any economist (one not bought by a special interest that is) will tell you all you get is change, the total activity stays the same. One sector goes down but the other rises. That’s capitalism, anyone cry over the dedicated wordprocessor manufacturers – e.g. Wang – when they were replaced by PCs?.

    Take a very simple and personal example. If you ensure that every new house has (say) to be a 5 star energy rating, with solar panels, insulation, perhaps a CHP, etc, etc. Yes, the capital cost of the house goes up, but the total cost, purchase + running costs go down. So over a few years the total house cost is actually lower. This appplies even more to offices and shops. Retrofitting is expensive, but if you design and buid them from the start with this in mind the marginal cost is surprisingly small.

    Similarly we kill all coal fired power stations and replace them with (depending on local resources) nuclear, wind, solar, etc. Yes, the coal companies take a hit, but the nuclear/wind/etc companies grow. Net economic impacts zero or beneficial, plus the benefit that energy costs now start to stabilise instead of rising all the time (as these are all capital dominated technologies), with the attendent affects on the whole economy. The trade deficit drops as well.

    Ditto building high quality metropolitan train networks and city-to-city very fast train networks. The car/truck manufacturers, freeway builders, airlines and oil companies take a hit, but the train manufacturers and operational companies grow. Net economic impact actually positive, reduced imports again, with at the very least the same number of jobs.

    We cannot become prisoners of the past or of vested interest groups. To grow means creative distruction (not the neo-con type though, real building and replacement).
    .
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    Fabius Maximus: I have never seen an analysis suggesting that “energy saving/alternative energy. Over and over again we get the ‘it will collapse the economy, everyone will become poor’.”
    .
    Decreasing energy input to the global economy too fast will slow the economy, just as cutting off air to you or I will slow us down. The difference is that the economy can adjust over time. In economics matters time and magnitudes matter — rendering so many of the general discussions that ignore numbers.

  6. Mikyo permalink
    13 April 2008 1:08 am

    I wonder if we could be seeing a sort of “national stages of grief” over peak oil? Stages such as definied by Kübler-Ross? Many still in denial, some still angry, others finally beginning to think of bargaining?

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