Crisis on the China Rim: An Economic, Crude Oil, and Military Analysis

"There is a crisis rising on the China Rim, a crisis made of economic imbalances, energy insecurities, ancient hatreds, and unsettled scores. The catalyst for this crisis is success itself, the success of the People’s Republic of China in its de facto rejection of a failed experiment in communism and its rapid transformation into a thriving market economy. The inseparable companion of this success, though, is an insatiable hunger and thirst for precious resources... most important among these, crude oil."

2005.04.14 | 85 pages | download

On Friday, 2005.06.24, Securing America’s Future Energy (SAFE) and the National Commission on Energy Policy co-sponsored an oil supply crisis simulation dubbed "Oil Shockwave".  This simulation involved a hypothetical scenario in which social unrest in Nigeria, a terrorist attack on oil industry infrastructure in Alaska, and political dislocations in Saudi Arabia, combine to remove 3.5 MM barrels of crude oil from the world's daily oil flow of approximately 83.0 MM barrels.  (These assumptions imply a crude oil flow disruption of just 4.2%.)  The US response to this scenario took the form of a mock cabinet-level meeting charged with the task of advising the president of the US as the crisis unfolds.  Notable consequences of this scenario, as indicated below, included US$161.00 crude oil prices and US$5.74 per gallon US gasoline prices.

Here is a summary of the "Oil Shockwave" hypothetical scenario, simulated consequences, and notable participants.

Scenario:

• Unrest in Nigeria
• Attack on an Alaskan oil facility
• Emergency evacuation of foreign nationals from Saudi Arabia
• Removal of 3.5 MM barrels of oil per day (4.2%) from a global daily flow of 83.0 MM barrels

Consequences:

• Gasoline prices of US$5.74 per gallon
• Global oil price of US$161.00 per barrel
• Heating oil prices of US$5.14 per gallon
• US gross domestic product decline for two consecutive quarters
• 30.0% drop in US consumer confidence
• Spike in consumer price index of 12.6%
• Surge in US current accounts deficit to US$1.087 trillion
• Decline of 28.0% in the S&P 500
• Aggressive pressure on US from China to end arm sales to Taiwan
• Pressure on US from Saudi Arabia to changes US policy on Mid-East peace process

Notable Participants:

• Robert M. Gates, former US Director of Central Intelligence
• Richard N. Haass, former US Director of Policy Planning at US Department of State
• General P.X. Kelley, USMC (Ret.), former Commandant of US Marine Corps, member of the Joint Chiefs of Staff
• Don Nickles, former US Senator
• Carol Browner, former Administrator of the US Environmental Protection Agency
• Gene B. Sperling, former US National Economic Advisor
• Linda Stuntz, former US Deputy Secretary of Energy
• Frank Kramer, former US Assistant Secretary of Defense for International Security Affairs
• R. James Woolsey, former US Director of Central Intelligence

In our 2005.04.14 "Crisis on the China Rim..." (CCR) analysis, Laguna Research Partners forecasted the emergence of a new industry that we call the Energy Security Industry (ESI).  Here's an excerpt from page 5 of CCR:

"The "Energy Security" Industry – Laguna Research Partners forecasts the genesis of a new industry that we call the "Energy Security" Industry.  The Homeland Security Industry was born of sudden necessity in late 2001 and, likewise, we expect that an Energy Security Industry will be born of urgent circumstances.  Just as companies in the Homeland Security Industry provide solutions for the protection of people and high value assets against high impact terrorist attacks, energy security companies will provide products and services that heighten the security of energy products that are in transit "from wellhead to final consumer".  Some energy security companies already exist, and many other companies will adapt current technologies to energy security applications.  Laguna Research Partners will issue a separate report outlining our definition of this new industry, and our analysis of industry dynamics and key players."

Recent new highs in global crude oil prices reflect the fact that the emergence of both China and India as major consumers of crude oil has left very little "wiggle room" in the worldwide crude oil production and distribution network.  Put another way, any minor intentional or accidental disruption of global oil flow could have a significant and immediate negative impact on the US economy.

The profound economic consequences resulting from last Friday's "Oil Shockwave" crisis simulation underscore the the likelihood, we feel, that an Energy Security Industry will emerge in the US.  Further, we believe that there is an urgent need for the US Congress to enact legislation that will "jump start" the creation of such an industry.

Posted by:
Kevin B. Skislock
Partner and CEO
Laguna Research Partners
[bio] [disclaimer]

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