Final warning

Tag : Oil Pipeline Valves

went to press) to $200 or more, while the financial speculatorGeorge Soros predicts that rising oil prices could send the USeconomy into recession.

Expensive fuel at the pumps is just the start. These battles overthe price of oil could be the harbinger of something even scarier.There is a growing realisation that we are teetering on the edge ofan economic catastrophe which could be triggered next time there isa glitch in the world's oil supply.

A number of converging forces are making such an event more likelythan ever before. First, there is the spectacular rise in globaloil consumption, which, according to the International EnergyAgency (IEA) now stands at 87 million barrels of crude (about 10billion litres) a day. Most geologists now accept we have reached,or will imminently reach, peak oil. Some fields in the US and theNorth Sea have been pumped dry and production is becomingincreasingly concentrated within fewer countries. Add a boost fromspeculators betting that things will get even worse, chicanery bythe Organisation of Petroleum Exporting Countries (OPEC) cartelwhich over the past two years has added Angola and Ecuador to itsranks to mask the decline in production of its existing members,and it's not hard to see why prices have been forced ever upwards.But price conceals the much more complex mess we're in.

In the past, it has usually been possible to ride out anydisruption to world oil flows - whether from accidents or hostileacts - by pumping more oil from the ground. That spare capacity hasnow all but vanished, as oil producers cash in on soaring prices byextracting as much of the stuff as they can. "There isabsolutely no slack in the system any more," says Gal Luft,executive director of the Institute for the Analysis of GlobalSecurity, a Washington DC-based think tank specialising in energysecurity. It is this lack of wriggle-room that has brought us tothe brink.

In the days when oil producers had more leeway, they could make upfor a disruption somewhere in the system by quickly raisingproduction by around 3 million barrels a day, says Nick Butler,head of the Cambridge Centre for Energy Studies, part of theUniversity of Cambridge's Judge Business School. That crucialreserve capacity has now fallen below the daily output of someproducers - meaning that if the taps were turned off in any one ofa number of unstable oil-supplying nations, such as Nigeria, Iraq,Iran or Angola, the impact would be felt almost immediately.

This has left the oil market so fragile that a few well-placedexplosives, an energy-sapping cold winter or an unusually intensehurricane season could send shock waves across the globe. Thepotential consequences are so serious that governments are drawingup emergency plans to cope should the worst happen. According toone analyst who took part in a simulation of just such a crisis,the situation most experts fear is what they call a"psychological avalanche".

Here's what happens. A small, distant country one day finds it canno longer import enough oil because of a spike in prices orproblems with local supply. The news media whip this up into astory suggesting an oil shock is on the way, and the resultingpanic buying by the public degenerates into a global grab for oil.

Most industrialised countries keep an emergency reserve as a firstline of defence, but in the face of worldwide panic buying this maynot be enough. Countries in which the oil runs out face transportmeltdown, wreaking havoc with international trade and domesticnecessities such as food distribution, emergency services and dailycommerce. Without oil everything stops.

The roots of our oil addiction can be traced back to the end of the19th century, when petroleum began to be pumped from wells acrossAmerica. It wasn't long before it become obvious what a greattransport fuel it could provide. Oil-based fuels paved the way forintensive farming and extensive road networks; they drove theinflux of populations into cities, drove growth in shipping andeventually made mass air travel possible. "Oil has shaped ourcivilisation. Without crude oil you'd have no cars, no shipping, noplanes," says Gideon Samid, head of the Innovation AppraisalGroup (IAG) at Case Western Reserve University in Ohio.

And it's not just about fuels. A giant chemical industry relies onoil as its feedstock, and without it many of the products we nowtake for granted would vanish. "You'd see no plastics, nobags, no toys, no cases on TVs, computers or radios. It'sabsolutely everywhere," says Samid.

"Much of the economic expansion and growth of the humanpopulation in the 20th century is directly tied to the availabilityof large amounts of cheap oil," says Cutler Cleveland,director of the Center for Energy and Environmental Studies atBoston University. "There isn't a single good or serviceconsumed on the planet, except in rural economies, that doesn'thave oil embedded in it. Oil is the lifeblood of the globaleconomy."

The secret of oil's success is its portability and extraordinarilyhigh energy density. One barrel of oil contains the energyequivalent of 46 US gallons of gasoline; burn it and it willrelease more than 6 billion joules of heat energy, equivalent tothe amount of energy expended by five agricultural labourersworking 12-hour days non-stop for a year.

The vast majority of oil is consumed by transport. In the US, thatsector accounts for nearly 70 per cent of the 20.7 million barrelsthe country gets through each day. .

More than half of the world's oil comes from seven countries, theleading supplier being Saudi Arabia, which produces more than 10million barrels a day. Then come Russia, the US, Iran, China,Mexico and Canada. Twenty years ago, there were 15 oilfields ableto supply 1 million barrels a day. Now, there are only four. Thelargest is the Ghawar field in Saudi Arabia.

The IEA, which advises 27 countries on oil emergencies, requiresits members to hold at least 90 days' worth of fuel, which can bepooled and released onto the market if a crisis looms. The systemlast swung into action in 2005 when hurricane Katrina caused theshutdown of more than 23 per cent of the US's oil productioncapacity. A few days after Katrina struck, the IEA ordered therelease of 2 million barrels a day from reserve stocks for a month,the first time reserves had been released since the Gulf war in1991.

About half the world's oil is distributed by tankers mainly plyinga handful of key routes across the oceans. The rest goes through anextensive network of pipelines that can carry different grades ofcrude and synthetic compounds, such as lubricants. The bewilderingcomplex of pipelines - extending 90,000 kilometres in the US alone- crosses continents and dips under oceans.

The pipelines are often above ground and vulnerable to accidentaldamage or attacks by saboteurs. When working, however, they providean extremely efficient way of transporting oil. A pipeline thatpumps a relatively modest 150,000 barrels per day delivers theequivalent of 750 oil tanker truck loads or one delivery every 2minutes, day and night. Even if a pipeline is damaged, it canusually be quickly repaired. Valves at intervals along the pipe canisolate the leak while the damaged section is replaced.

Disruption can still be costly. A report in 2005 by a US House ofRepresentatives subcommittee on terrorism reported that sabotage tooil pipelines in Iraq had cost the country more than $10 billion inlost revenues, even though protection had been a high priority forthe coalition troops since they invaded two years before. Thereport suggested that groups hostile to the US and its allies werebecoming increasingly expert at mounting these attacks.

Choke pointsEven outside a conflict zone, accidents can causeserious disruption. Last year, the IEA was on standby to releasereserves after an explosion in Minnesota shut down part of the5000-kilometre Enbridge pipeline, which pumps 1.9 million barrelsof crude a day from Canada to the US Midwest. This single incidenthalted one-fifth of US oil imports for days.

Oil deliveries by sea are vulnerable too. A fleet of 4000 tankersplying six main routes delivers more than 43 million barrels of oilevery day. Many of these routes pass through narrow "chokepoints", and if any of these were to become impassable, eventemporarily, the effect on oil supplies could be dramatic.

For instance, more than 16 million barrels of oil a day are shippedthrough the Strait of Hormuz, at the mouth of the Persian Gulf,taking oil from Saudi Arabia, Iran, Iraq, Kuwait, Qatar and theUnited Arab Emirates to the US, western Europe and Asia. At itsnarrowest point, the strait is only 33 kilometres wide. Ifnecessary, some of Saudi Arabia's exports could be diverted throughthe 1200-kilometre East-West pipeline to the Red Sea, but itsmaximum capacity is only 5 million barrels a day, half of which isalready taken up.

Between 1984 and 1987, during the Iran-Iraq war, both countriesattacked tankers in the Strait of Hormuz, causing shipping to dropby 25 per cent. In 2003, the Bush administration claimed it hadprevented further attacks on shipping in the strait.

Another pinch point occurs in the Strait of Malacca, which narrowsto just 2.7 kilometres between Sumatra and Singapore. Tankers fromthe Persian Gulf and west Africa transport some 15 million barrelsa day through the strait en route to Japan, China and other Pacificdestinations. A report by Luft claims that some tankers have beenhijacked here by would-be terrorists whose initial aim has beensimply to learn how to operate them. In 2003 a small chemicaltanker called Dewi Madrim was taken over by 10 armed men, whosailed it through the strait before leaving with equipment andtechnical documents.

One scenario being suggested is that hijackers might commandeer aliquid natural gas tanker plying one of these shipping routes, loadit with explosives and use it to ram an oil tanker. If thisfloating bomb produced a burning oil slick, it could render thepassage impassable for months, tipping the global economy intocrisis as alternative routes would fail to make up the lostsupplies.

Another key element in the global oil infrastructure is Abqaiq, anenormous processing facility in Saudi Arabia, which removes sulphurfrom two-thirds of the country's crude. The CIA estimates thatseven months after a large-scale attack, output would still be only40 per cent of its full capacity.

More than half the oil from Abqaiq is pumped to the largestoffshore oil terminal in the world, Ras Tanura on the Persian Gulf,which handles one-tenth of the world's oil. This makes it a primetarget for attack, and the site is as heavily defended as amilitary base. "If you have a facility like this and a planecrashed into it, or terrorists get in and somehow succeed inblowing it up, then you have a very, very significant disruption onyour hands. That is what analysts see as a doomsday scenario,"Lufts says. Reuters reported that one planned attack on theterminal was thwarted in 2006. Saudi oil production is particularlyvulnerable because it is concentrated in a few massive productionand distribution sites. "If one or two of these facilitiesgoes down, then the entire system goes down," says Luft.

So what would the impact be if oil supplies choked? In 2005, agroup of current and former US government and national securityofficials were asked to address this in a live role-play exercise.Playing the part of the national security adviser was Robert Gates,who the following year became Secretary of Defense. The scenariosthat unfolded were developed with officials from the Shell oilcompany in the Netherlands, a former US presidentialcounter-terrorism adviser and industry analysts.

The simulation kicked off with an upsurge of political violence inNigeria, the fifth-largest supplier of oil to the US. In theensuing turmoil 600,000 barrels of oil production a day were lostfrom the Niger delta. The violence coincided with the start of acold winter in the northern hemisphere, which increased demand by700,000 barrels a day. Together, these events boosted the price ofa barrel of oil from $58 to $82; a proportional rise today wouldpush the price beyond $195.

Events began to gather pace when, a month later, the simulationthrew in an attack on the Haradh natural-gas processing plant inSaudi Arabia, which forced the country to cut 250,000 barrels perday from its exports - equivalent to the oil consumed every day inSwitzerland - to meet domestic needs. Next, news arrived of anattempt to ram a hijacked supertanker into another vessel moored ata jetty at Ras Tanura. This was closely followed by a similarattack at the oil port of Valdez in Alaska, as well as a groundattack which set fuel depots alight. With the world oil shortfallnow at 3.4 million barrels per day, the price per barrel had shotup to $123. Against the recent peak price of $139, that rise wouldtake the cost per barrel to $295.

The turmoil leads to an aggressive crackdown on anti-western groupsand their sympathisers, which temporarily quells further attacks.Then, six months into the simulation, a terrorist campaign islaunched against foreign workers in Saudi Arabia, killing 200 andwounding 250 within 48 hours. Evacuation of foreign workersfollows.

Though oil production continues unchecked, this loss of expertiseleaves Saudi Arabia unable to meet future demand and with no sparecapacity. Fears that this could lead to shortages in the futurebring speculators into the market, and the price per barrel risesto $161. At the end of the simulation, global production has fallenby 3.5 million barrels a day, or 4 per cent of world oil supplies.One of the participants, Jim Woolsey, a former head of the CIA,described the scenarios as "relatively mild compared to whatis possible", yet this proved enough to almost triple theprice of a barrel of crude.

The key conclusion being drawn from this scenario is how reliantthe global oil market is on Saudi Arabia's ability to ramp upproduction on demand. If this extra oil is not available, the pricerockets. Saudi Arabia's recent reluctance to increase productionand the ensuing price rises in today's real-life oil market amplybear out this prediction.

So where does this leave us at a time when global oil production isapproaching the point when it stops growing and starts to decline?Most industry experts, including geoscientists and economists, whowere polled by Samid in 2007 said that peak production will occurby 2010. This contrasted with a similar survey conducted two yearsearlier, in which respondents were split, with many of theeconomists opting for a later date. "Now, a real consensus isemerging," says Samid.

This tells us that we will have to start making serious attempts towean ourselves off oil, and fast. It will be no easy task."It's hardly conceivable that the world could function withoutoil," says Didier Houssin, director of oil markets andemergency preparedness at the IEA.

Finding a replacement fuel for transport is the biggest challenge.So far all the alternatives have hit the skids. For example,hydrogen, which could potentially replace oil as a green fuel ifmade using renewable sources of energy, has storage anddistribution problems. While biofuels, which could be an easierreplacement for fossil fuels, require feedstocks that compete withfood crops for water and agricultural land. "To get thesealternatives close to what oil can do, you have to invest a lot ofmoney," says Cleveland, something most governments and energycompanies have done reluctantly, and at pathetically low levels."These aren't insurmountable problems, but they suggest thetransition has some formidable challenges," he adds. One wayor another oil will become more scarce, even more costly and willalways have the disadvantage of generating carbon dioxide when it'sburned. However hard it may be, the sooner we make the break, thebetter.