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Prepared by the
Institute for the Analysis of Global Security

July 12, 2004
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Energy Security Current Issue

China and US should set up a strategic dialogue on energy issues
Interview with Dr. Gal Luft of the Institute for the Analysis of Global Security, originally published by 21st Century Business Herald in Chinese.

A crude threat
The terrorist campaign against Iraq's pipelines demonstrates that pipeline attacks are no longer a tactic but part of a sustained, orchestrated effort that can deliver a significant strategic gain. They can also cause significant damage to the global oil market.
Next in line to emulate the insurgents in Iraq could well be Islamist terrorist groups operating in Central Asia, among them Chechen separatists and the Islamic Party of Liberation, a group that seeks to carry out a holy war against the West and is a suspect in the recent wave of deadly attacks in Uzbekistan.

Chilly response to U.S. plan to deploy forces in the Strait of Malacca
Whether something is profoundly wrong in the dialogue between the U.S. and the two Asian powers is an important question in itself, but the real issue is what is the best mechanism to secure the world's most important shipping corridor, through which one quarter of world trade and half of the world's oil and two thirds of liquefied natural gas move each day.

North Sea oil is declining
Since the 1970s North Sea oil has not only been a major source of wealth for both the British and Norwegian economies but also a way for Europe to cut its dependence on Middle East oil. Now many of the major fields in the North Sea are in decline and the North Sea is about to lose its prominent role as one of the world's leading oil domains.

Terror's Big Prize
Since September 11, pipelines, tankers, refineries and oil terminals have been attacked frequently. Except for a sharp increase in maritime insurance premiums in these regions these attacks had marginal strategic consequences. But in at least two cases oil terrorism could have rattled the world.

Libya: changing its spots?
Libyan crude oil is particularly attractive due to its very low sulphur content, which requires much less refining than higher sulphur oil. It is extremely high quality crude, whose characteristics are not easily found elsewhere. Despite its unique treasure, Libya's production capacity is relatively small, standing on 1.5 mbd of crude, or 2% of world supplies.
Since the 1988 Lockerbie bombing Libya had been under U.S. and UN sanctions which hindered its ability to generate enough investment to develop its oil sector. Libya's decision to embark on a rapprochement with the U.S came at unsurprisingly perfect timing, just as concessions for major U.S. oil companies were about to expire.

On the technology front

Fuel Cell power plant installed at NJ College
The fuel cell will provide 250 kilowatts of electric power as well as heat, to several buildings on the campus.

Biomass-to-Ethanol Progress
The enzyme costs of converting cellulosic biomass into sugars for fuel ethanol production have been reduced approximately twenty-fold with technology developed by the National Renewable Energy Laboratory (NREL) and Denmark based Novozymes, biotech-based leader in enzymes and microorganisms.

EU study: Methanol from biomass - competitive with gasoline
A study of a new patented Swedish technology concluded that the alchohol fuel methanol can be produced from biomass via black liquor gasification at a cost competitive with that of gasoline and diesel.


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Back Issues

Oil Kamikaze

In the past two months no fewer than a dozen people in Iraq and Saudi Arabia demonstrated in three separate incidents their willingness to die for the cause of hurting the U.S economy in what appears to be a new phase in the war on terror.

Unlike scores of martyrdom seeking suicide terrorists who have killed themselves throughout the world in recent years these ten had a goal which extended beyond plain murder. Their target was the global energy market, or more specifically oil -- in the words of al Qaeda "the feeding to the artery of the life of the Crusader nation".

The first of the attacks took place on April 24 when suicide terrorists aboard three boats attempted a coordinated attack on oil terminals in and around the southern Iraqi city of Basra. Had the attack succeeded, destroying Iraqi oil's last remaining outlet to the Persian Gulf, almost two million barrels per day of Iraqi crude would have disappeared from an oil market that, as it is, has almost no wiggle room.

A week after the Basra attack seven expat oil workers were murdered by their al-Qaeda affiliated colleagues in the Saudi city of Yanbu. Three weeks later, Saudi terrorists attacked two oil industry compounds at Khobar killing 22 people and taking dozens hostage.

By preventing Iraqi oil from going back online the perpetrators hope to increase the cost of the occupation to the American taxpayer and hence weaken American resolve. By terrorizing foreign oil workers in Saudi Arabia they undermine the Kingdom's capability to develop its oil industry. Success in both missions would destabilize the oil market and drive prices as high as possible to the detriment of the U.S.

All of those involved in these attacks surely assumed that there would be no return from their mission. Yet, realizing the sensitivity of the U.S. economy to fluctuations in energy prices, they were willing to forfeit their lives just to bring chaos to the world's trading floors.

Nothing conveys the terrorists' calculus better than a statement following the Khobar attack by al Qaeda's top leader in Saudi Arabia Abdulaziz al-Muqrin who was killed last week by Saudi security forces: "The operation [..] took the oil price to its highest levels of over $42, while Saudi Arabia is committed to America's prosperity by providing oil at the cheapest prices."

Oil terrorism is now emerging as one of the biggest threats to global economy. Pipelines, tankers and oil terminals are soft targets which can be easily sabotaged by those willing to sacrifice their lives in order to deny the U.S., the world's largest oil consumer, cheap oil. The fear premium of roughly $8 per barrel which brought the price of oil to its current peak is a true achievement for al Qaeda and its affiliates.

It is becoming increasingly evident that the America's growing dependence on imported oil allows terrorists in the Middle East to hurt the U.S. economy without ever leaving their home base. Terrorists no longer need to trick the FBI nor the U.S. immigration services in order to enter America and wreak havoc in our cities. By striking oil targets in their backyard, in the region where they enjoy the strongest support, they can hurt us just as well. Beyond the immediate additional cost to the U.S. economy of about $36 billion per year due to higher oil prices, the rise in oil prices dampens U.S. economic recovery and has almost offset President Bush's tax cut. Most economic recessions that hit the U.S. since the WWII were caused by oil crises. If oil terrorism continues, the $42 per barrel mark could soon be a fond memory.

According to the DOE, total petroleum demand is projected to grow at an average annual rate of 1.6 percent per year, from 19.6 mbd in 2002 to 28.3 mbd in 2025.

With diminishing spare production capacity the oil market is losing its shock absorbers and is more vulnerable than ever to supply disruptions. As terrorists become increasingly aware of our Achilles heel their motivation to exploit it will strengthen. To insulate itself from such disruptions the U.S. should increase its strategic petroleum reserve beyond its current 600 million barrels capacity and encourage other countries to do the same. More important, since most of the oil used in the U.S. is for transportation, the U.S. should reduce its overall demand for oil by increasing fuel efficiency and powering vehicles with made in America next generation fuels that are not based on oil. Without such action we may continue to protect our airports and planes only to find one day that oil kamikaze deny us the fuel to fly them.

Gal Luft is executive director of the Institute for the Analysis of Global Security (IAGS) Top