Lethal Trajectories

by Michael Conley

  “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 lea
st 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

  Using the above example, China could hold out for 219 days by drawing from its SPR to make good the 20% loss of Saudi oil. The United States could do so for 162 days. If the percentage of oil taken off the market climbed to 30%, the days remaining for the United States and China would be 108 and 146 days respectively until the full economic impact of the embargo was felt. On the surface, China has a slight edge in staying power, but the United States has far more fat to trim and could outlast China by instituting aggressive austerity and conservation programs and ramping up liquefaction and bio-mass fuel production efforts.

  Bottom Line: Depending on the level of oil supply reductions, neither country has more than 5-7 months to resolve the crisis or face catastrophic economic consequences. Given other variables that could divert SPR reserves from direct injection into the domestic economy, such as military operations, oil support shipments to allies, additional OPEC holdbacks, etc., the Saudi oil crisis has to be resolved within five months—by March 2018—to avert a complete global economic meltdown.

  Geopolitical Scenarios and Options:

  King Mustafa holds the upper hand for the moment. He has the oil and is immune from attack by virtue of his dirty bombs. The Saudi economy could be sustained indefinitely by selling a mere 2-3 MB/D of oil at outrageously high prices. It seems likely Mustafa will use the threat of attacks by cruise missiles armed with dirty bombs to coerce oil reductions from Gulf countries bordering Saudi Arabia. They include the following countries with daily production levels shown in parenthesis: Kuwait (2.4 MB/D), Qatar (1.0 MB/D), and UAE (3.0 MB/D). Loss of any or all of the collective 6.4 MB/D of oil produced by these countries will greatly magnify the crisis. It remains to be seen how other OPEC nations will respond, but Iraq (6.0 MB/D) and Iran (4.2 MB/D) are not expected to play ball with Mustafa.

  Planning Considerations:

  A. King Mustafa is likely to attempt the following within the next thirty days:

  Gain agreement quickly to as many of his Five Demands as possible.

  Isolate Israel and support Hamas and Hezbollah insurrections around Israel.

  Marginalize Iran, neutralize Iraq, and sway OPEC producers to his cause.

  Foment destabilization in the Middle East as a prelude to global jihad.

  Fragment global opposition, and create rifts between the superpowers.

  B. Four distinct challenges and/or operational risks attendant to any allied response:

  Oil supply will shrink and require tight rationing and austerity programs.

  If defeat is imminent, Mustafa is likely to detonate dirty bombs.

  Military conflicts and civil unrest will intensify as nations struggle to survive.

  Zero-s
um solutions may not be workable given the global nature of the oil crisis and its all-pervasive impact on international commerce. Economic vitality requires robust domestic economies that can buy and sell goods.

  Options and Possibilities:

  The purview of this Executive Summary is not to suggest a specific plan of action, but rather to provide a continuum of options ranging from full military responses to collaborative, asymmetric solutions. The options are compartmentalized into three generic approaches—each of which can be blended or tweaked to meet desired objectives. A detailed description of each option follows this Executive Summary. The three approaches are as follows:

  1 Collaborative and Asymmetric Approach:

  The asymmetric approach would create a united front difficult for the Saudis to oppose. It would feature a war of attrition with an endgame strategy of causing regime change in Saudi Arabia through domestic insurrection. It would require a global coalition united against Mustafa and willing to take collective measures—including rationing, resource-sharing, and collaborative strategic planning—to achieve common objectives. It would be critically important to engage China and major nations in this coalition. The downside of this approach is the time, patience, and collaboration required to develop and sustain the coalition.

  2 Go-It-Alone Approach:

  This approach would enable the United States to act quickly and aggressively to protect its own best interests with respect to securing oil supply. It would be easier to implement with immediate gains, and it represents the ultimate zero-sum game. It would rely almost exclusively on the military and economic power of the United States to achieve desired results for its own purposes. The downside is it would fragment the global community and create an “every nation for itself” mentality that would preclude the possibility of global leverage being used against King Mustafa.

  3 Military Solutions:

  This approach calls for an aggressive military response that could include the use of nuclear weapons. It would also require a full-scale mobilization of forces. It could be conducted as a standalone operation or in collaboration with others. It could include occupying chokepoints such as the Strait of Hormuz, interdicting OPEC ships, commando raids on Saudi territory, and a host of other military actions. The downside is the possibility that Mustafa will detonate dirty bombs that permanently deprive the world of Saudi oil.