Lethal Trajectories - Michael Conley [87]
Prepared By:
Anthony T. Mullen, Director
Central Intelligence Agency
TOP SECRET
EXECUTIVE SUMMARY
Report Overview:
The Royal Saudi government was overthrown by an inside coup led by Prince Mustafa ibn Abdul-Aziz on 27 September 2017. Mustafa pulled all Saudi oil off the global oil market—estimated to be over 16% of global production—and mined Saudi oil fields with dirty bombs as a barrier to intervention by other nations. It is likely he will coerce other OPEC producers—particularly those countries abutting the Saudi border—to reduce oil production. He has also issued a list of demands outlining his requirements for restoring Saudi oil. These Five Demands are unlikely to be met, and the global economy is henceforth at risk.
This report will a) provide a historical context for the crisis; b) define the dimensions and implications of the Saudi oil embargo; c) assess the economic staying power of the United States and other nations under a dramatically reduced oil regimen; and d) offer scenarios and options for addressing the crisis.
Historical Context:
Despite clear warnings to the contrary, belief persisted that the world would have a sufficient supply of oil for decades to come. While supply exceeded demand in the first decade, production in that timeframe plateaued in the 86 MB/D (million barrels per day) range with a growing mix of fuel coming from unconventional sources such as tar sands, ethanol, etc. New discoveries failed to keep pace with the amount of oil being extracted, and no new giant oil fields—the backbone of global oil production—were being found. With the more easily accessible oil gone, advanced technologies were used to find new ultra deep water oil deposits and to exploit existing fields through enhanced oil recovery (EOR) techniques. Today, despite technological progress, about eight barrels of oil are extracted for every new barrel discovered.
In 2008, oil prices spiraled to $147 per barrel but quickly plummeted during the greatest global recession since the Great Depression of the 1930s. As oil prices sagged, the level of new exploration slowed dramatically; the impact of this slowdown was eventually felt in 2013–14 in the form of reduced oil supply. By 2012, demand equaled supply and all excess capacity was taken out of the system. From 2013 on, the nominal demand for oil—the amount of oil that would have been consumed had there been no oil shortages—increased at a rate of 1% per annum, while oil supply decreased by 2% annually. Alternative energy systems were not in place to take up the slack, and the 3% swing in the oil supply/demand differential had a direct and disastrous impact on the global economy.
Historically, rising oil prices have been precursors to recessions. A good rule of thumb is that economic stagnation will occur when the aggregated costs of oil exceed 4–5% of GDP. Applying this bellwether to the American economy in 2017, the ratio now stands at 8%, leaving little capital for discretionary spending or economic growth. The global oil-to-GDP ratio mirrors that of the United States.
Oil prices are pegged to the petrodollar transactional system, and the devalued American dollar means that it takes more dollars to buy a barrel of oil. While this is problematic, Mustafa’s threat to abolish the petrodollar system will significantly impact the U.S. financial position and destabilize global currencies and oil markets if implemented.
The two great oil issues of the day revolve around the access and affordability of oil, and each has to be viewed in a global context. Regarding access, over 80% of the world’s proven oil reserves are controlled by OPEC and their national oil companies (NOCs). While OPEC reserves are unaudited and questionable, they still dominate and control the oil markets. Unfortunately, the NOCs have found it more economically attractive to rely on rising oil prices than on costly new oil-production efforts to generate desired revenue targets. Further, they know that oil left in the ground today will be worth more in the future. Accordingly, the oil