Annual Threat Assessment – Director of National Intelligence

From Pg 40-43

GLOBAL ENERGY SECURITY

Access to stable and affordably priced energy supplies has long been a critical element of national security. Sustained increases in global demand and the interactive effects of energy with other issues have both magnified and broadened the significance of developments in the global energy system. Oil prices in late 2007 were near record levels and global spare production capacity is below the market’s preferred cushion of 3 to 4 million barrels per day (b/d).

FACTORS FUELING HIGH
PRICES

Geopolitical uncertainties and tensions heighten the risk of a major oil supply disruption and the attendant negative repercussions for the global economy. Threats to Iraqi and Nigerian oil output remain a concern despite some positive developments last year. Terrorist attacks against Persian Gulf oil facilities and the potential fallout from mounting tension with Iran over its nuclear program are significant additional risks.

In Iraq, completion of a new pipeline and security improvements have helped Baghdad boost production and exports in recent months by several hundred thousand barrels per day, but output remains vulnerable to episodic violence.
Ethnic and political violence and criminal activity threaten a large portion of Nigeria’s 2.2 million b/d of oil output. Approximately 550,000 barrels per day (b/d) in potential oil production, about a fifth of Nigeria’s production capacity, have been offline since February 2006 because of militant attacks, and probably another 100,000 b/d are stolen. Over the past two years, the amount shut in has been as much as 900,000 b/d.

Even greater and more prolonged disruptions could occur again with no advance warning, and this fear is contributing to upward pressure on oil prices in international markets. US companies have billions of dollars in investments in Nigeria. Abuja has begun to take these problems more seriously and directed national security assets to the area. However, local militias, who target oil facilities and kidnap foreign oil company personnel, will remain a persistent threat until political and other grievances are addressed.

Public statements by al-Qa’ida leaders indicate that terrorists are interested in striking Persian Gulf oil facilities.

Iran could withhold some or all of its 2.4-million barrels per day oil exports or even try to impede the flow of 18 million barrels per day of oil through the Strait of Hormuz if its pursuit of the nuclear fuel cycle sparks a major crisis; however, we assess Tehran is likely to take these provocative steps only if it perceived it had little to lose. Venezuela’s President Chavez has pledged solidarity with Iran and might also curtail some or all of his country’s exports of about 2 million b/d in such a scenario.

WINDFALL FOR PRODUCERS

High energy prices and escalating demand for oil and natural gas, also has resulted in windfall profits for producers. OPEC countries earned an estimated $690 billion from oil exports last year, nearly three times the revenues earned in 2003. The increased revenues also have enabled producers like Iran, Venezuela, Sudan, and Russia to garner enhanced political, economic and even military advantages and complicated multilateral efforts to address problems such as the tragedy in Darfur and Iran’s nuclear program.
With about 70 percent of global oil reserves inaccessible or of limited accessibility to outside oil companies, competition between international oil companies to secure stakes in the few countries open to foreign investment is likely to intensify.
Determined to secure the energy inputs necessary to fuel continued robust economic growth, Chinese and Indian state owned and private energy companies are pursuing strategic investments in energy assets worldwide. We also see a sharp rise in Russia’s investment abroad, much of it driven by Russian energy companies. Moscow is using the power of its energy monopoly to ensure that East-West energy corridors remain subject to Russian influence.

RISING GLOBAL FOOD PRICES

Global food prices also have been rising steadily over the past two years driven by higher energy prices which push up input costs weak harvests, historically low stocks, and robust demand. Wheat prices were up over 60 percent in 2007, and are at a 20-year high. Other foodstuffs such as vegetable oils also are near records. There is little near term relief in sight because production increases in several countries, including Australia, are hampered by water shortages and land constraints. High food prices in several countries, including Russia, China, India, and Vietnam, are forcing governments to engage in market distorting practices such as banning food exports, increasing subsidies, or fixing prices: Food prices are likely to be an issue in several upcoming elections, and probably were important in the February elections in Pakistan.

The double impact of high energy and food prices is increasing the risk of social and political instability in vulnerable countries. Corn protests in Mexico, bread riots in Morocco, and recent unrest in Burma are directly linked to higher food and energy prices. Higher food prices, as well as rising transportation and logistical costs, also have outstripped global aid budgets and adversely impacted the ability of donor countries and organizations to provide food aid. For example, the World Food Program’s food costs have increased by more than 50 percent over the past five years and are projected to grow another 35 percent by the end of the decade.

US Senate Committee on Armed Services (PDF)