The Relationship Between Energy Infrastructure Attacks and Crude Oil Prices

In December 2005, a video statement was aired on Al-Jazeera in which Ayman al-Zawahiri called for attacks aimed at oil facilities in the Middle East. In response, crude oil prices rose by nearly US $1. This incident is but one example in recent years when the oil market has responded to threats to energy infrastructure (EI) by increasing oil prices. While a dollar increase does not seem alarming, it becomes more concerning when one considers that every dollar-per-barrel increase costs the United States economy a reported $4 billion a year, according to Gal Luft at the Institute for the Analysis of Global Security. More specifically, this example calls attention to how violent non-state actors (VNSA) are able to leverage oil market dynamics and harvest a global public relations platform by targeting EI.
Capitalizing on modern energy security and crude oil market characteristics, today’s VNSA operating in oil and gas producing and/or transit regions are quickly learning that attacks aimed at EI can not only be an effective way to target state and international energy assets, cause economic damages, and garner broad media attention, but also a way to effect global turbulence in the form of oil market volatility. Hence, these micro-actors are functioning in an environment that enables them to become global players.

Discourse on the targeting of energy infrastructure is largely centered on scenarios that involve sizable attacks to critical nodes that would in effect significantly disrupt supply. While this is certainly important, today’s VNSA are quickly learning that it doesn’t take a major, low probability yet high consequence – and thus expensive – EI attack to garner global attention and/or create broad consequences. Rather smaller, more frequent, relatively low-cost attacks can render greater returns – both in damages and in crude oil pricing effects. Take for example Nigeria where VNSA have succeeded in cutting oil production by nearly 1 million barrels per day (bpd). This was not accomplished through one or two major attacks but rather a sustained campaign of disruption that escalated in 2006. The attacks were so heavy and sustained that Angola recently overtook Nigeria as Africa’s number one oil producer.

Granted, the main factors driving high crude oil prices from the 2004 to mid-2008 period can largely be attributed to record demand from a global economic boom, price inelasticity, and tightened supply. However, political instability in producer regions further compounded this challenging environment. Such turbulence resulted in what analysts defined as a security or “risk premium” – ranging from as low as US $4 to as high as $25 dollars per barrel – being placed on crude oil prices within this timeframe. In fact, during this period one can find a direct correlation between EI attacks and increasing global energy prices driven by traders and speculators who viewed EI targeting as a threat to supply and, perhaps, an exploitable opportunity to inflate prices. As follows, this article will review the changing energy security environment and highlight how EI attacks from 2003 to 2008 had an effect on crude oil pricing. We conclude by calling attention to the triangle of crude oil trading, EI attacks, and oil pricing.

Journal of Energy Security