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June 28, 2005

Oil Crash Would Crash The U.S.

By: Rowan Wolf

According to the outcome of an excersise called Oil Shockwave, the U.S. economy is completely vulnerable to "catastrophic disruption of oil markets." The simulation is reported by John Mintz of the Washington Post. The "game" involved a number of high ranking former government officials in a simulation of skyrocketing oil costs and their effects on the U.S. economy.

The scenario involved gas prices rising to $5.32 a gallon, and a shaky global economy. Robert Gates (former CIA Director) noted "The American people are going to pay a terrible price for not having had an energy strategy," and that the scenarios presented in "Oil Shockwave" were "... absolutely not alarmist; they're realistic." The conclusion? "[T]he U.S. government had few options in the short term to prevent an economic crash in this country and worldwide."

As I discussed in the June 24, 2005 article China Makes Move To Take Over Unocal, the war gamers at "Oil Shockwave" also referred to the impact of China's oil usage and the recent move to acquire Unocal:

"The war game players also referred several times to other real-life events of today. A major feature of the exercise was how China's voracious appetite for oil is driving up world prices, and only yesterday it was announced the Beijing government, in a bold and unprecedented act, is bidding to buy the U.S. oil company Unocal."

FindLaw details some of the specifics of the "Oil Shockwave" scenario:

The scenario removed only 3.5 million barrels of oil from a global market of more than 83 million barrels, resulting in the following consequences:

* Gasoline prices of $5.74 per gallon;

* Global oil price of $161 per barrel; * Heating oil prices of $5.14 per gallon;

* Fall of gross domestic product for two consecutive quarters;

* Drop in consumer confidence by 30 percent;

* Spike in the consumer price index to 12.6 percent;

* Ballooning of the current accounts deficit to $1.087 trillion;

* Decline of 28 percent in the S&P 500;

* Aggressive pressure on the U.S. from China to end arm sales to Taiwan, and;

* Demands from Saudi Arabia for changes to U.S. policy regarding the Mid- East peace process.

FindLaw notes key recommendations to soften the blow:

* Once oil supply disruptions occur, there is little that can be done in the short term to protect the U.S. economy from its impacts, including gasoline above $5/gallon and a sharp decline in economic growth potentially leading into a recession.

* There are a number of supply and demand-side policy options available that would significantly improve U.S. oil security. Benefits from these measures will take a decade or more to mature, and thus should be enacted as soon as possible.

* Supply-side measures include promoting developing of conventional oil reserves in nations currently off limits to private investment through enhanced U.S. diplomacy, increase research and development into environmentally-benign extraction of unconventional oil reserves such as oil shale and tar sands, and enable siting of new liquid natural gas and other energy facilities.

* Demand-side measures include promoting energy efficient passenger vehicles with incentives for hybrid electric vehicles, strengthen fuel economy standards, and increase research and development into plug-in hybrids and hydrogen fuel cell vehicles.

* Alternative fuel measures include increased research and development that enables ethanol production from plant materials, fischer-tropsch diesel from domestic coal, and hydrogen from coal and eventually from renewable sources.

The war game was put together by Securing America's Energy Future and the National Commission on Energy Policy. SAEF has some of the data that underlay the creation of the "Oil Shockwave" scenario. They provide a series of charts on oil production and use. There is also a detailed list of the participants in the exercise. The National Commission on Energy Policy has a link to "Oil ShockWave featured on Fox News Channel's Special Report with Brit Hume".

None of the findings of "Oil Shockwave" surprise anyone following peak oil issues, but they do provide clear support for the realistic nature of our assumptions, and credibility for the predictions of oil crisis outcomes. It is very difficult to just brush off the evaluations of the participants in the war game.

Posted by Rowan at June 28, 2005 7:49 AM Category: Peak Oil --- Social Implications

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I didn't know you were given to understatements. Crash you say? Try absolute anarchy, rioting and rampaging, hysteria, looting and shooting the likes of which have never been seen before. Look at collective behavior and its extremes from the everyday perspective, i.e. sporting events fighting, road rage that results in violence, etc. then compare the stress levels precipitating such conduct against that which would result from a shut-down of our transportation system. It sure isn't pleasant to think about.

Posted by: goesh at June 29, 2005 9:10 AM

Hi goesh,
Believe it or not I frequently resort to understatement. I would agree with your evaluation of the likely outcome of a collapse.

Posted by: Rowan at June 29, 2005 9:58 AM

Just fyi, FindLaw didn't write the article. With these PR write-ups, you can usually tell who published it by the text, but if not, the Contact area at the bottom will show you the companies that sponsored the article, or in the least show you the media folk the author(s) employ as PR reps.

PR Newswire is more focused on conferences, news events, research and other similar stories from organizations, and so on....

Posted by: joe at July 6, 2005 5:45 PM