A possible collapse of Saudi Oil Production?

This is a paper put together by the Heritage Foundation , a Right-Wing Think Tank. 

Obviously people in the Peak Oil movement are not the only ones contemplating the consequences of the overthrow of the Saudi ruling family.

Part of the article follows:

Thinking The Unthinkable: Modeling A Collapse Of Saudi Oil Production – Analysis

Written by: The Heritage Foundation

April 11, 2012

By Ariel Cohen, Ph.D., David W. Kreutzer, Ph.D., James Phillips and Michaela Bendikova

Eurasia Review,

26 April, 2012

Summary

If an “Arab Spring” uprising completely disrupted Saudi oil production, the U.S. and the global economy would face a massive economic and strategic crisis. Russia and Iran as oil-producing states would likely exploit the crisis to increase their power around the world while undermining U.S. influence, especially in the Middle East. To guard against the economic and strategic dangers, the U.S. should prepare emergency measures before such a crisis. Releasing strategic petroleum reserves in coordination with other countries, tapping the North American energy resources, and reducing domestic energy consumption would limit the impact of the crisis and facilitate recovery. However, it is also in the U.S. interest to use its influence and resources to assist allies and friends during the crisis.

Iranian threats to block oil shipping in the Strait of Hormuz, if acted upon, could disrupt the global energy supply and cause oil prices to spike. However, as this report suggests, this scenario is relatively short term. It leaves the oil-producing infrastructure intact, and prices would stabilize if military action, led by the United States, and a coordinated international response successfully restore security to the sea-lanes.[1]

Saudi Arabia

However, policymakers need to consider a more dangerous scenario: the collapse of Saudi Arabia’s oil production caused by a massive social upheaval like those that have toppled regimes in Tunisia, Egypt, and Libya.

In 2006, 2008, and 2010, The Heritage Foundation conducted simulations to assess the strategic and economic impact of a major disruption of energy supply caused by Iranian military action in the Strait of Hormuz or by coordinated terrorist attacks on key nodes in the global energy infrastructure.[2] This report uses the methodology developed in these previous reports and builds on their findings and models. It examines a situation in which an “Arab Spring” uprising disrupts Saudi oil production, causing a total cessation of oil production for one year—a drop of 8.4 million barrels per day (mbd)—followed by a two-year recovery. Given the recent events in the Middle East, U.S. and international policymakers should examine such a radical scenario, albeit considered unthinkable by some.

This analysis demonstrates that the most effective response is to plan ahead for a massive oil supply disruption and think strategically about its impact. The United States should create in advance an interagency task force under the National Security Council and the National Economic Council to enhance national security and economic security of the United States by using all available policy tools to guarantee the flow of oil. The U.S. should also reserve the option of deploying military forces to Saudi Arabia or other Gulf Cooperation Council (GCC) countries upon their request. The stabilizing presence of U.S. forces and U.S. leadership around the world would significantly contribute to weathering the crisis. In addition, the U.S. should take steps to mitigate the domestic crisis. Releasing strategic petroleum reserves, tapping the North American resources, and reducing energy consumption by U.S. government agencies would accelerate the recovery at home.

A Hypothetical Scenario: Complete Disruption Of Saudi Oil Production

In this hypothetical scenario, the same anger, frustration, and pent-up demands for political and economic reform that has destabilized regimes throughout the Middle East also roils Saudi Arabia, which initially appeared to be immune from the Arab Spring upheavals. As elsewhere, the initial impetus for protests comes from liberal reformers working through a grassroots campaign using Facebook and Twitter, calling for genuine democracy, transparent government, equal rights for women, and greater political, social, and personal freedoms. Shi’a and Sunni religious radicals quickly join the liberal protesters, swelling the crowds of protestors.

Saudi authorities clamp down on the peaceful protests, and Saudi police fire at violent demonstrators largely drawn from the Shi’a minority in the oil-rich Eastern Province.[3] Protesters react by seizing oil facilities and attacking infrastructure. Saudi internal security forces, augmented by Salafist/Wahhabi zealots, who contemptuously denounce the Shi’a protesters as heretics, seek to oust the protesters. As Saudi security forces crack down on the protesters in the Eastern Province, the fighting damages or destroys key energy facilities. Iran stokes the conflict by providing the Saudi Shi’ites with money, arms, propaganda support, and training.

In the ensuing internal strife, the Saudi dynasty in Riyadh is toppled, and the princes flee, are arrested, or are killed. A loose coalition of Wahhabi clerics and elements connected to al-Qaeda in the Arabian Peninsula seizes power and expels all non-Muslim foreign workers. The exodus of skilled technicians and oil workers exacerbates the situation by significantly delaying repairs of damaged infrastructure and impeding operation of oil facilities that are not damaged. As a result, nearly all Saudi oil production stops and oil exports are halted.

The new Islamist regime is reluctant to sell oil to the U.S. and European markets, preferring to sell to China and the Far East. Eventually, Saudi Arabia starts producing oil again at a reduced level of 4 mbd to 5 mbd, similar to Iran’s oil production after the fall of the Shah and the rise of Ayatollah Khomeini. If Saudi production fails to recover fully and global demand for oil keeps prices high, other oil-producing countries eventually fill the demand. They include suppliers that use new sources and technologies, such as Canadian oil sands, U.S. oil shale, and so forth.[4]

Saudi Revolution: The Economic Impacts

The Saudi Kingdom is the largest oil producer in the world—occasionally surpassed by Russia—and essentially dominates the oil market due to its large excess production capacity, which it can ramp up to 12 mbd. A prolonged and massive disruption of Saudi oil production would significantly affect global energy markets and economic activity. However, for this economic analysis we look only at the effects on the United States. The impact in Asia, a principal customer of Saudi oil, would likely be much worse. It is difficult to calculate the magnitude of the panic in the global capital market that such a scenario would cause.

We modeled total cessation of Saudi oil production, an 8.4 million-barrels-per-day reduction, for one year followed by a two-year recovery. For the purpose of this exercise, we optimistically assumed that repairing destroyed and damaged facilities and gradually restoring oil exports to the previous level would take approximately two years. In reality, the repairs and production recovery could take much longer.

Even though withdrawals from strategic petroleum reserves (SPRs)—emergency oil stores in the U.S. and Europe and to a lesser degree in China and Japan—start immediately, SPRs cannot compensate for such a massive disruption. We would expect to see the following impacts over the three-year course of production loss and recovery:

• Gasoline prices jump to more than $6.50 per gallon,
• Petroleum prices jump from $100 per barrel to more than $220 per barrel,
• Employment losses exceed 1.5 million jobs, and
• Gross domestic product (GDP) drops by nearly $450 billion.

Daily withdrawal of 3 mbd from the strategic petroleum reserves—half from the U.S. reserve and half from other countries as coordinated through the International Energy Agency (IEA)—would offset barely one-third of the lost Saudi production in the first quarter. These combined SPR withdrawals would drop to 2 mbd in the second quarter, 1 mbd for the third quarter, and 0.5 mbd for the fourth quarter.

Saudi production recovers to an average of 2.8 mbd in the second year and 5.6 mbd in the third year. It fully recovers by the fourth year, and petroleum and gasoline prices return to the baseline. However, the initial shock of the net loss of 5.4 mbd in the petroleum market has a corresponding impact on the U.S. economy with the greatest impacts occurring in the first two years.

Over the first two years, U.S. GDP loses $214 billion per year. Employment averages 1.1 million jobs below the baseline, bottoming out at more than 1.5 million lost jobs in the second quarter of the second year. Petroleum prices rise more than 120 percent in the first quarter to more than $220 per barrel. At the end of the second year, petroleum prices are still 45 percent above the baseline at $138 per barrel. The gasoline price immediately rises to over $6.50 per gallon. Although it moderates as the economy adjusts to the shock, it is still 28 percent above the baseline at the end of the second year. For the entire three-year period of loss and recovery, employment averages 900,000 fewer jobs and GDP losses total nearly $450 billion, an average loss of $150 billion per year.

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