Lethal Trajectories (26 page)
“How are you doing, Jack? I see you found your way here—with the aid of a Marine helicopter,” Clayton said. “C’mon, let’s debrief on the trail. No sense wasting the chance to get outside.” They started down a gently winding path patrolled, no doubt, by stealthy Secret Service agents one had to strain to spot.
“You did a great job putting this together with Wang Peng and Lin Cheng,” Clayton said. “It’s still hard to believe it’s actually going to happen, but as I understand it they will be here around eight o’clock tonight.”
“That’s right, Clayton. They sent their own security agents up here earlier to scan for bugs and check out the communication hook-ups—as far as I know, they’re still here. I think I saw a couple of them on my walk. Peng was embarrassed they had to take these security precautions, but he joked that, like Ronald Reagan, they preferred to ‘trust but verify.'"
Clayton laughed. They knew they would expect nothing less if the situation was reversed.
“That Five Demands announcement out of Riyadh almost queered the whole deal,” Jack said. “Peng told me Lin Cheng was ready to scrap everything, including the United Nations visit, and head back to Beijing. And then, after thinking about it, he realized there couldn’t be a better place for him to be in the early stages of a world crisis than here—right next to the other superpower. They’ll be here, but Peng wanted us to know they might have to leave at a moment’s notice.”
Clayton nodded, and they proceeded at a brisk walk as a mild drizzle started to fall. Jack knew his brother’s silence to be one of deep thought; he himself spent a few minutes considering the many ways in which the summit might evolve.
“What’s the latest from the White House?” Jack asked, tired of prognosticating on the outcome of the coming meeting.
“It’s been unbelievable, Jack, and I’m not totally sure where to start. Prime Minister Yakov Nachum called yesterday from Israel, after Mustafa’s speech. I don’t know what Nachum is like under normal circumstances, but he was really rattled when he talked to us.” Clayton summarized the exchange as they took a side path down to a little creek.
“After that, we had a full Situation Room meeting and issued a short statement that I’m sure you’ve heard by now. Basically, we reiterated our support for Israel and bluntly told the new Saudi regime that an attack on Israel would be considered an attack on the United States. We condemned the actions of King Mustafa’s regime and disavowed any complicity in the so-called CIA/Zionist plot they drummed up to cover their butts. We urged all nations to keep their cool until we could sort everything out. It was a heated meeting, but Elizabeth Cartright turned all of her diplomatic prowess on us and got the hard-line and softer-line factions talking to each other.” Clayton grimaced. “It’s pretty bad when it takes the secretary of state to broker an internal meeting.”
“We had two follow-up conversations with Nachum, and he seemed a little more settled. Even though Israel is essentially energy-independent, he asked for a petroleum guarantee. We told him we too would be strapped but would do our best to help if needed. We also reminded him that Israel would lose all support from the United States if it launched a preemptive strike against the Saudis, but I honestly don’t know if he got it,” Clayton said, shrugging his shoulders.
“The CIA confirmed the detonation of an atomic bomb in the southern wastelands of Saudi Arabia. The estimated yield was about thirty-five kilotons of TNT—less than Mustafa had indicated—and our agents are certain that the dirty-bomb threat is not a bluff. But the EMP capability Mustafa claimed is the greatest physical threat to the United States, and they probably do have delivery systems to make it happen. The CIA also estimated the Israelis have at least 150 nuclear warheads with a means of delivery, and they appear to be dusting them off right now.”
Jack shivered at the thought of a nuclear conflagration in the Middle East or an EMP strike on America.
“The president will do whatever he can this weekend to show the colors and keep the media watchdogs away from us,” Clayton said, “and not even the SWAT team knows we’re here. I’m sure the Chinese are every bit as anxious as us to keep it hushed up.”
“How is the president doing?” Jack asked with a sense of foreboding.
“Not good, I’m afraid,” Clayton replied with sadness. “He’s been on the horn continuously with world leaders and even held a couple of short interviews. I’ve got to tell you, though, I think this is his last hurrah. He’s a trooper, but he’s using up whatever reservoir of energy he has left. I only hope he makes it through the weekend in one piece.”
As they approached the Main Lodge, Clayton mentioned again his conversation with the president about moving up the succession date. “I told him my preference would be to go with October fourteenth, as planned, but it’s his call based on his health. Every extra day he can buy us by hanging in there will give us that much more time to prepare.”
They picked up the pace as the rain started to fall. The fire in the lodge would be inviting. “By the way, Jack, did you look at the CIA report? What did you think?”
“I read it, and I agree with everything in it. I also sent a copy to Wang Peng before I left, as you had requested, and I’m sure he’ll review it with Lin Cheng on their way here. They’re both plugged into the energy situation, and I doubt they’d take issue with much of it.”
Clayton asked, “Any suggestions for how we ought to play the meeting tonight?”
“Play it by ear, that’s all I can say,” Jack said with a grin. “Peng has given us a strong endorsement, and Lin Cheng strikes me as a man who’ll dive right in. We have a lot of ground to cover, but I’d first concentrate on building a relationship with him.”
Clayton murmured an agreement and then added, “I’m going to my room to take one more quick-read of the CIA report. Just knock when you’re ready to go down for the meeting.”
Back in his room, Clayton pulled out the CIA report. He shuddered to think how the world would react to the grisly truth, once it was known—an event likely to take place around the time he was sworn in as president.
What a way to start,
he thought as he opened the report.
Top Secret
Saudi Arabian Coup
Oil Crisis Analysis
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 production lost through NOC inactivity translates into shortages that reduce global supply and drive up the price of oil, decreasing affordability. Peak production, the point at which oil can no longer be produced at an affordable price, was reached in 2013, and oil production has decreased by about 11% since then.
Chart A illustrates the supply and demand curves from 2012–2017 and impacts of shortages on the affordability of oil.
Chart A
Supply, Demand, and Pricing History
Impacts of Saudi Oil Crisis:
The global economy has been in a semipermanent state of recession since 2013 and is over 12 MB/D short of meeting current nominal demand. The abrupt loss of Saudi oil—and any other collateral reductions Mustafa can wrangle out of OPEC producers—will decrease supply to catastrophically low levels. Chart B illustrates the macro production numbers in 2009 and 2017 as a way of gauging the growing impact of Saudi oil on the global oil markets.
Chart B
Growing Impact of Saudi Oil
The Saudis possess about 25% of the world’s easily accessible proven reserves. If this oil were withheld indefinitely from world markets, oil prices could at least double—provided anyone could afford to buy oil in the range of $500 per barrel. At this price, Americans would pay over $14 per gallon at the pump. Further, it is anticipated that several OPEC members will make at least token supply cuts in a show of solidarity with Mustafa. Kuwait, Qatar, and the United Arab Emirates (UAE) are particularly vulnerable to Saudi coercion. The crisis will worsen if other OPEC producers make even minimal incremental cuts in production.
Sustainability and Risk Factors:
All oil-importing nations are at immediate risk from the Saudi oil embargo, as there are no alternative oil markets. A nation’s ability to respond to the embargo will depend on three things: 1) Oil inventories currently in their infrastructures, 2) Strategic Petroleum Reserves (SPR) available for tapping, and 3) Consumption patterns and ability to conserve and/or ration oil. A nation-by-nation analysis is underway but not available at this time. This report will focus on the United States and China, which collectively consume about 40% of the world’s oil.
The economic impact of Saudi oil restrictions will be felt immediately by poorer nations lacking oil or SPRs and then quickly spread to all other oil-importing nations. Global trading will slow to a trickle as huge de facto tariffs, in the form of sizeable transportation costs to ship goods, take hold. Domestically, the transportation and travel sectors and related industries will suffer first. The cost of farm products will skyrocket as fossil-fuel derivative products such as pesticides, herbicides, and fertilizers increase in price along with fuel costs.
The United States:
The United States now imports about 13 MB/D of the 17 MB/D of oil it uses daily. With the exception of the Bakken Oil Field, producing about one million barrels of oil per day, and Gulf deepwater drilling, there is limited domestic production in the lower 48 states. Coal and natural gas liquefaction efforts could be ramped up to increase domestic production of gasoline, but with some damaging environmental side effects. Corn-based ethanol production was curtailed in response to its detrimental impact on food pricing. Gulf oil production lagged after the Deepwater Horizon oil spill and moratorium in 2010, and Alaskan oil production is now insignificant. America’s consumer-based economy will feel an immediate pinch as discretionary consumer dollars are redirected into energy and food costs. America’s alternative and/or renewable fuel systems are not sufficient to replace oil-based energy lost from the embargo.
China:
Domestic oil consumption in China now stands at about 14 MB/D of oil, of which 12 MB/D is imported. Despite successes in locking up oil leases and guaranteed oil supply contracts throughout the globe, China has a growing oil need to support. In 2010, China surpassed America as the largest total user of energy from all sources, and it also became the largest new-auto market in the world. While China has made aggressive investments into high-speed rail systems and has a robust renewable-energy infrastructure program underway, it has a growing population with rising expectations. This creates daunting economic growth challenges exacerbated by a reduced oil supply.
Other Nations:
Non-OPEC oil-exporting nations such as Russia and Brazil will be in a favorable position, but virtually all OECD countries will fare poorly. India, with its growing industrial base, will be particularly hard-hit. Japan, still struggling to recover from nuclear energy losses sustained in the 2011 earthquake/tsunami and nuclear meltdown, will be in dire straits. OPEC countries will continue to allocate a growing portion of their oil production inventory for domestic use, leaving less available for export. The rising costs of agricultural products and loss of cheap energy for water and desalinization systems will be devastating to third world countries. Mass migrations and regional wars over water and other resources will become endemic.
Strategic Petroleum Reserve (SPR) and Inventories of the United States and China:
Oil inventories in both countries are at record lows, and spot shortages occur regularly. Inventories are scattered throughout the domestic energy chain; draining reserves in a systematic way to make good on oil shortages will be problematic. While this report refrains from projecting the shelf life of existing oil inventories, a detailed report will soon follow.
The SPR for both countries is quantifiable; the amount of SPR oil available to replace that lost in the embargo is perhaps the best measure of how long each economy can sustain itself. The SPR of the United States dropped from a high of almost 800 million barrels in 2011 to the current level of 422 million barrels. (America’s SPR was repeatedly tapped in the interim years in response to political pressures to stabilize gasoline prices.) China’s current SPR stands at 525 million barrels as a result of determined efforts to build it incrementally. The maximum daily flow rate at which oil can be extracted from the SPRs of both countries is 4 MB/D; daily shortfalls exceeding this level cannot be made good and will directly result in a deterioration of the economy.
Chart C provides a projection of each country’s ability to replace oil lost from the embargo by drawing down their SPRs. It provides a timeframe based on the percentage amount of oil taken out of the system by the embargo; the higher the percentage, the quicker the SPR will be used up. Once SPRs are depleted, both economies will feel the full force of the embargo.
Chart C
Comparative Positions of China and the United States