High Oil Prices and the Terror Premium

Risk of disruption to the world’s oil supply lines continues to mount. Many of the world’s most critical oil-producing nations are also among the most unstable, and their instability is only increasing.

Because the U.S. is a net importer of oil, the price of oil in the U.S. is at the mercy of conditions far outside of its borders and its control. The threat of political instability in Venezuela, Nigeria and Iraq, as well as the heightened risk of terrorist attacks in Saudi Arabia, is cause of great concern for oil companies. Doing business in these areas is risky for oil companies, which must face corrupt governments, destruction of facilities from terrorists (such as in Iraq), and internal strife.

Texas-based think tank Stratfor noted this point in a recent analysis: “The energy markets are dealing with a terror premium from the fear that the next militant attack could come anywhere, and a war premium from the Iraqi situation. Taking into account the heightened global awareness of political violence, the world has a combined premium anywhere from $5 a barrel to $20 a barrel, depending on what analysis you rely upon” (August 19).

According to Congressional Quarterly, this “terror premium,” which has contributed to record high oil prices, is likely to remain. With growth in demand outstripping supply and spare oil capacity dwindling down to 2 percent of global demand, the oil market is highly susceptible to price hikes.

That spare oil-producing capacity had dwindled to only 1.5 million barrels a day means that a single terrorist attack on a major supply line could cause a massive shortage. Experts figure it would take a spare capacity of 6 million barrels per day to ensure that no single terrorist attack would cause a shortage. Any event, such as a terrorist attack, that reduces the capacity will force prices higher.

Right now, however, it is the mere threat of such an event that has contributed to sky-high prices—and that threat continues to grow.

In an oil crisis simulation called Oil Shockwave, co-sponsored by Securing America’s Future Energy (safe) and the National Commission on Energy Policy, experts sought to discover what would happen to oil production as a result of terrorist attacks and regional instability. According to safe President Robbie Diamond, the simulation proved “that even relatively small reductions in oil supply will result in tremendous national security and economic problems for the country” (PR Newswire, June 24).

The simulation of a supply disruption of just 3.5 million barrels of oil, in a global market of 83 million barrels, resulted in gas prices rising above $5 dollars a gallon, oil prices rising to $161 dollars a barrel, a decline of the gdp for two consecutive quarters, and the U.S. current account deficit soaring to $1.087 trillion. Such an economic crisis could easily launch the U.S. economy into a recession and create an economic tsunami the world over.

The effects of an oil supply disruption would be incredible and devastating.

That fact raises the question, what terrorist organization wouldn’t be tempted to try it?

Ironically, high oil prices help fund terrorists. Iran, the biggest state sponsor of terrorism, holds 10 percent of the world’s proven oil reserves and is opec’s second largest producer. As a state sponsor of terrorism, is there any doubt that Iran may use a portion of that money to fund terrorist training camps and equip terrorists?

The U.S. will simply never overcome the terrorist threat until it confronts Iran. Four years after the war on terrorism began, the U.S. still lacks the will to confront terrorism’s biggest sponsor. As a result, terrorism still runs rampant with the funding and support it needs.

The experts are right. The terror premium is here to stay.