Let’s Not Play The Oil Game

No doubt it’s a sign of the times. Today’s war games have more to do with the falling supplies and rising price of oil than with tanks and armored personnel carriers rolling across borders. Consider just such an exercise, conducted several months ago at the World Economic Forum in Davos. The setting was late December 2006. In a simultaneous three-front strike, terrorists sank a tanker in the Bosporus, blocking the Turkish straits linking the oilfields of the Caspian Sea with the Mediterranean. They also successfully attacked the oil port of Valdez in Alaska. An assault on the critical Ras Tanura complex in Saudi Arabia was rebuffed, but several million barrels a day (roughly 5 percent of world supply) were taken off the oil market for at least four months.

..What can we learn from this exercise? First: with global demand and supply balanced so closely, and with so little excess production capacity, it doesn’t take much for oil prices to skyrocket. In the scenario, a slender loss of supply caused prices to more than double. In the real world, similar results could be caused by any number of events: terror, conflict with Iran over its nuclear program, political instability in Nigeria or irresponsibility in Venezuela, even a hurricane or earthquake. And as opposed to the Davos scenario, there’s no guarantee that such a disruption would be short-lived.

Newsweek