Sleeping With The Devil Read Free Page B

the International Monetary Fund looked at the
    effect of a hypothetical five-dollar-per-barrel rise in the price of oil. Gross domestic
    product in the United States and most European countries would decline .3 percent on an annual
    basis. Financial markets would fall, but not to disastrous depths. Nations with a net export of
    crude oil would grow in wealth; those with a net import would fall. The Far East would suffer
    particularly because it produces so little oil of its own.
        But all that was calculated on what would have been a then roughly 20
    percent rise in the price of crude, a mild bump as economic catastrophes go. The terrorist
    attack on the Abqaiq oil facility envisioned by the Reagan-era scenarists would remove as many
    as 5.8 million barrels of crude a day from world markets, double the three million barrels a
    day taken out of production during the OPEC oil embargo, almost double the daily amount lost to
    the revolution in Iran and the subsequent Iran-Iraq war, and almost one-fourth the current
    average daily consumption.
        What does history tell us about the effects of such a loss? Well,
    Americans saw double-digit annual inflation only ten times in the last century, four if you
    exclude the effects of the two world wars: in 1974, in the wake of the OPEC embargo, when
    inflation soared to 11 percent; and in 1979-81, when inflation topped out at 13.5 percent. By
    1981 the price of a barrel of crude had hit $53.39, and regular gasoline was selling at U.S.
    service stations for over $2 a gallon.
        The OPEC embargo sent the stock market plummeting. By the time the
    Standard & Poor 500 bottomed out in September 1974, it had lost 47.7 percent of its value
    in twenty-one months, almost exactly equal to the 47.8 percent lost in the twenty-eight months
    beginning in March 2000 as the dot-com bubble burst. Between 1980 and 1982, the index gave up
    another 27.1 percent of its value as the unrest in Iran and Iraq rocketed oil to staggering
    highs.
        Inflicting selectively heavy damage on the Abqaiq oil-processing center
    would almost certainly duplicate those inflation figures and send stock indices plunging again.
    A coordinated attack on Abqaiq, Ras Tanura’s Platform Four, and the East-West pipeline’s Pump
    Station One, just to pick and choose from dozens of potential targets, would increase both
    effects exponentially while leaching the last bit of elasticity from the global oil-supply
    chain. The U.S. Strategic Petroleum Reserve would only help prop up international markets for
    several months. Unless alternative sources of oil quickly kicked in after that, we’d be in
    virgin territory - a kind of economic equivalent of the postnuclear-holocaust world of Nevil
    Shute’s 1957 bestseller, On the Beach.
        So what exactly would happen to the price of oil? I’ve surveyed
    contacts in the oil industry, but no one could come up with even an approximate figure.
    Apparently, good econometric forecasts on this kind of scenario don’t exist. They tell me,
    though, that initially we could count on seeing oil hit $80 or $90 a barrel, based on supply
    and demand. But this does not factor in the panic that would ensue - wild speculative buying.
    And then there is the wild card of run-of-the-mill disruptions occurring at the same time, like
    in Nigeria or Venezuela. Now we have oil selling at way over $100 a barrel. But what if chaos
    in Saudi Arabia slopped over the border into the other Arab sheikhdoms that collectively own 60
    percent of the world’s oil reserves? My contacts won’t even touch that one, but my guess is
    that we’d see oil at $150 a barrel or a lot higher. It wouldn’t take long for everything else
    to follow suit: economic collapse, world political instability, and a level of personal despair
    not seen since the Great Depression.
        Incidentally, Osama bin Laden has a more modest price expectation for
    Saudi oil: $144 a barrel. Take that multiple over the