Tuesday, 10 April 2012
A Saudi Oil Crisis. How Would the US deal with It?

The Heritage Foundation recently updated its previous scenarios and models concerning a possible disruption of Saudi oil production in the wake of an Arab Spring type of revolution in the Kingdom.  The findings and scenarios are detailed in a report released today, “Thinking the Unthinkable: Modeling a Collapse of Saudi Oil Production”.

The Heritage Foundation Morning Bell Report had the following summary:

Is America Prepared for a Saudi Oil Crisis?

Heritage Foundation scholars devised a hypothetical scenario of what such an uprising would look like, the consequences the world would suffer, and steps the United States could take to avert an economic catastrophe. But because of America's dependence on foreign sources of oil, pain cannot be entirely avoided.
[ . . .]
Watching from afar, Americans would learn of protesters seizing oil fields and attacking infrastructure. Fighting would damage key energy facilities, Iran would stoke the conflict by providing Saudi Shi'ites with money, and arms, propaganda support and training, and ultimately the Saudi dynasty would collapse as a new Islamist regime rises to power. Wahhabi clerics and elements connected to al-Qaeda in the Arabian Peninsula would seize power and expel all non-Muslim foreign workers. With the loss of skilled workers, all Saudi oil production would cease -- along with oil exports.

And here is where the damage to America would begin. Even with tapping the Strategic Petroleum Reserve (SPR), the United States couldn't compensate for the loss of oil. (And it would be worse off if the SPR were prematurely released for political purposes).

Gasoline prices would jump to more than $6.50 a gallon at current market levels, petroleum prices would climb from $100 to more than $220 per barrel, more than 1.5 million jobs would be lost, and by the time energy markets recover, America would lose $450 billion in GDP.

In the event of an economic crisis like this, Heritage experts write that the free market is the best instrument to ride out the storm, and that government's task is be prepared to support that effort rather than to jump in and try to tell markets what to do. Here at home, the government should tap the SPR while also permitting the development of North American natural resources -- that means opening up lands in the Arctic National Wildlife Refuge and offshore in the Pacific, Atlantic and the Eastern Gulf of Mexico. In addition, the government should allow the construction of infrastructure like the Keystone XL pipeline to deliver petroleum to suppliers. And since these resources take years to develop, Heritage's experts recommend that the U.S. government begin to pursue these policies today so that America can be prepared to absorb a disruption of its energy supply.

We have seen that US domestic oil production on private lands has actually increased given incentives developed during the Bush Administration. However, development on Federal lands has dropped over the past three years under the Obama Administration as it has not issued additional development permits.  Further, Israel is developing of both off shore natural gas and potentially oil in its exclusive economic zone in the Levant Basin in the Eastern Mediterranean. Then there is the potential of on-shore oil shale deposits which might make for significant energy contribution. That prospect could be an important geo-resource game changer. For Israel it means achieving energy independence given continuing threats to natural gas supply from the Egyptian Sinai fields, see this latest report of another gas pipeline explosion. However, there is skepticism as to whether the technology has matured to enable realization of an estimated reserves of more than 260 billion barrels of oil from shale in Israel’s Shefla Basin.

We asked oil and gas expert Fred Leder author of We Don’t Need Any Foreign Oil  (available at for his assessment of this Saudi Oil Crisis scenario and likely options.  Here are his comments:

 The late Matthew Simmons, in his 2005 book, Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, explained the complexities of producing oil in Saudi Arabia and suggested that at 10 million barrels per day( mb/d) they might be close to their limit. The actual number is a closely guarded secret. At any rate, the Saudis for a long time have been the swing producer in OPEC. That means that they pump more or less to meet the overall OPEC quota, thereby controlling the world price. Note that world production is about 85 mb/d. The Saudis produce roughly 12% which is critical in determining the price of crude oil.

If the Saudi Kingdom were to fall in a “Saudi spring” the new regime would probably not be able to control oil field production. Reservoirs that are close to watering out could be permanently damaged.  Even if the new regime intended to play the role in international markets that is currently played by the Kingdom, they probably could not do it.

It’s very difficult to predict the price of oil on international markets. Clearly the fall of the Saudi Kingdom would create such uncertainty in world markets that futures would spike, irrespective of the incompetence of the new rulers. Couple that to reservoir damage caused by poor engineering and possible war damage and you can have chaos. I would not predict the price of gasoline at the pump in America.

Israeli natural gas discoveries are about 20 trillion cubic feet or 150 years at present use rates. if the Israelis begin to sell gas in Europe and convert their electrical generation to natural gas they will find that they have far fewer years of reserves than they have now. My point is that right now Israeli natural gas is about 10% of their energy needs. If they sell the natural gas or expand its use in the economy it won’t last more than a few decades. I do not hold out much hope for Israeli shale. The technology for in situ recovery of oil from shale bitumen has never succeeded, despite years of research in the US.

American energy exploration and production need to be ramped up, sharply. The policies of the Obama government have been to impede such activity. For instance permits to drill on federal land have dropped sharply in the last three years. An ambitious exploration and production program will not solve the problem of US requirements to import oil, but it will ease the demand to buy OPEC oil.

One also needs to consider national security interests that are compromised by dependence on OPEC oil. We already know that the Chinese are making side deals with Iran and Venezuela, and are drilling in the straits between Florida and Cuba. It is one thing to outbid us in the futures market. It’s quite another to establish proprietary interests, especially those close to our own shores.

In addition to an aggressive exploration and production program, in my book,  I call for electrification of the transportation system in America. That means light rail and electric cars that would transfer the burden of transportation from petroleum to a combination of coal, natural gas and uranium, all of which are plentiful in North America. I also believe that coal and/or natural gas should be converted via Fischer Tropsch technology to motor gasoline. For instance 5 mb/d of Fischer-Tropsche gasoline from coal would create a million new jobs. With the steps suggested above, we would come close to closing the import gap, saving some 300 billion dollars annually in foreign exchange.

Posted on 04/10/2012 6:07 PM by Jerry Gordon
10 Apr 2012
Send an emailOrmond Otvos

A much more numerate and balanced view can be found at

The comments on Fischer-Trophe give it away.

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