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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

09 December 2005

Oil and terror

Ayman al-Zawahiri, al-Qaeda’s number two, has urged militants to attack oil targets in Muslim states. Where this attack to take place two things would rise: the price of oil and the chatter about the growing (and dangerous) dependence on Middle Eastern oil.

There is a growing consensus that increased instability in oil producing states is partly to blame for the increase in oil prices (what is called the “war” or “risk premium”). But to treat instability as the chief cause of concern is insufficient: oil producing states have always been unstable, and wars, revolutions, and strikes have disrupted oil supplies many times in the past.

What is different today is that there is no spare capacity in most producing countries and that there is growing concern of an attack in Saudi Arabia. Saudi Arabia is the only country with any spare capacity (estimated around 1 to 1.5 mbd); it has also traditionally acted as a “swing producer” adjusting supply to compensate for loses in production elsewhere. In other words, the oil system is less able to compensate for losses and the country that has usually served that purpose is under strain, both politically and in terms of oil capacity.

This brings us to a different idea: that the concept of oil security is bound to change. The lack of substantial investment in Middle Eastern countries means that there might not be sufficient supply to meet demand in reasonable prices; it also means that as countries expand capacity to meet demand, there is increased likelihood that they will not tolerate having idle capacity. This will take away a necessary element in crisis management. As J. Robinson West writes:

“it is worth recalling … that the excess capacity in Saudi Arabia was developed a long time ago, not from the Saudi government budget but by the former American partner companies of Aramco … It would be next to impossible for any government today to allocate billions of dollars from its current budget to build substantial production capacity for the intention of keeping it idle.”

In other words, regime stability is a threat that is only as strong as spare capacity elsewhere. We should be thinking about spare capacity more than we should be thinking about terrorism.

References:
In Jan H. Kalicki and David L. Goldwyn, eds. Energy & Security: Toward a new foreign policy strategy. (Washington, DC: Woodrow Wilson Center Press, 2005), p. 213

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