JOURNAL: After Abqaiq

"concentrate their attacks on Muslims' stolen oil, from which most of the revenues go to the enemies of Islam while most of what they leave is seized by the thieves who rule our countries." Ayman al-Zawahiri

More notes on the path to $100 a barrel oil...

After the near miss on Saudi Arabia's huge Abqaiq facility/field in February, additional elements of the group were rounded up (including the discovery of two more VBIEDs and ARAMCO documentation). These guerrillas learned the hard way that while the potential pay-off of a coup de main on the center of gravity of the Kingdom's oil production system was huge, the risks far outweigh the benefits. A similar lesson was taught to Zarqawi in Iraq when he attempted a speedboat attack on Basra's offshore tanker loading terminal in April of 2004.

Unfortunately, within open source warfare, weakness and failure is often a catalyst for radical improvement (under the assumption, which is a good one, that there is still a large undercurrent of support for the movement in Saudi Arabia). First, a failed large scale effort forces a collapse of centralized leadership. This devolution allows individual members more room for innovation. In general, within the context of systems disruption, brain power outweighs brute force 10 to 1. This is due to the leverage provided by network dynamics (ROI -- returns on investment -- of 200,000 to 1 are possible with the correct analysis). Second, since the group size is diminished, it dictates smaller attacks rather than larger ones. These smaller attacks naturally gravitate to undefended sections of the system. NOTE: It can take several iterations of failure to learn that symbolic terrorism has diminishing returns and concentrated conventional attacks aren't in line with the war's new equilibrium.

If the Saudi open source war proceeds according to form, it will inevitably move towards the disruption of coupled systems that support the oil system. These include water (used to inject into the fields to maintain positive pressure) and electricity (Saudi Arabia's grid is sparse and easily disrupted). A more complete description of how this would work can be found by reading this scenario in full:

Just after the second attack, the water group attacked their first target. It was one of the three major seawater pipelines feeding the water injection systems of Ghawar. Since seawater is injected into oil fields to maintain positive pressure, the loss of one of the major sources of water caused engineers to shut down oil production. This was due to the fear that asymmetrical water flows in the field could result in the flow of oil into unrecoverable pockets.

Comments

[John Robb]

NOTE: the price of oil is a good indicator of how well this war is going (since it is being driven by a combination of actual disruption and fears of more)....

[mark safranski]

"In general, within the context of systems disruption, brain power outweighs brute force 10 to 1."

Robb's First Rule of Superempowerment.

[Duncan Kinder]

"NOTE: the price of oil is a good indicator of how well this war is going (since it is being driven by a combination of actual disruption and fears of more)...."

Another good indicator is the price of gold. Basically, gold's value as a commodity ( for such purposes as jewelry, dentistry, electronics, etc. ) is about $250 / ounce. Any price above that measures its value as a currency.

As a currency, gold competes against the dollar, the euro, and other currencies. Accordingly, the greater gold's value, the lower the value of these other currencies.

The value these other currencies have ultimately rests upon the good faith and credit of their issuing governments. Therefore, the greater gold's value, the lower the good faith and credit of these issuing governments.

The objective of global guerillas is to undermine this good faith and credit. Hence we can measure their success by following the price of gold.

[Duncan Kinder]

If global guerillas succeed in driving the price of oil to $100 / barrel, one beneficiary would be Hugo Chavez, president of Venezuela.

According to the New York Times, Chavez currently is conducting an ambitious foreign aid program that could boomerang upon him if oil prices were to drop.

http://www.nytimes.com/2006/04/04/world/americas/04venezuela.html?ex=1144296000&en=612b44399c2857f6&ei=5087

Many of Chavez' ventures are intended to reduce United States' influence in Latin America.

(One point not discussed by the Times: to the extent that Chavez' actions force the United States to respond by devoting more resources to Latin America, the fewer resources the United States would then have to confront terrorists in the MidEast or elsewhere. )

[John Robb]

Good point Duncan. Although a selective strategy that targets a single state's currency (and its outflows to other currencies) is probably a better way to accomplish this (a Russian scenario may provide an example of this -- think "hard" currencies on the edge). Regardless, I think this level of sophistication is a ways down the road of development for GGs.

[James Bowery]

There is some fundamental confusion about fiat currency that needs to be cleared up: The value of fiat currency isn't magic -- it depends critically on the demand for it and that demand doesn't just materialize out of a collective hallucination. It materializes out of the threat a government can bring against those who do not present it as legal tender for the primary demand for legal tender: payment of taxes.

Any government's currency can therefore be targeted by the simple expedient of attacking its tax auditing infrastructure -- an infrastructure that is highly vulnerable.

[daCascadian]

James Bowery >"...Any government's currency can therefore be targeted by the simple expedient of attacking its tax auditing infrastructure..."

The multinational corporations have been very, very successful at attacking any & all of them

Gold (or any other commodity) isn`t a real answer to the "issues" surrounding fiat money either partly due to "externality" realities

"Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." - John Maynard Keynes

[farmergiles]

I think al-Zawahiri sounds like Leon & Vladimir back in the day.

[James Bowery]

I had mentioned: "attacking its tax auditing infrastructure..."

To which daCascadian responds: "The multinational corporations have been very, very successful at attacking any & all of them"

On the contrary, the multinationals have merely _exploited_ them. There is a big difference between attacking the audit infrastructure and exploiting it. The difference is between an enemy of a nation and a parasite of a nation respectivey. Parasites, even virulent ones such as multinationals, that have undergone a good deal of horizontal transmission, don't kill their hosts except by side-effect of their lack of reliance upon them.

[TM Lutas]

A 2 week price spike to $100/bbl oil is eminently survivable. We've got strategic reserves sufficient to ride that out. The problem only really surfaces when oil gets that high and stays there. Since there is a plentiful and easy (ie it's tried and true WW I era tech) engineering solution to oil at a far lower price than $100/bbl equivalent, $100 oil really is a combination boogie man and sad consequence of 1st world environmental legislation.

This hostile legal environment is slowing down investment in Fischer-Tropsch capacity that would allow the US to turn domestic coal into gasoline and diesel fuel.

If we are far sighted enough to create an automatic trigger that changes the legal environment so that a terrorist systempunkt attack would immediately enable F-T plant construction on a national emergency basis, we'd be able to figure out how long we'd be hurting and when the crisis would pass and we'd drop back down to $50 oil because whatever suppliers are knocked out due to terrorist activity are quickly replaced by strategic reserves and F-T coming online in large coal deposit countries.

The US would likely become a net energy exporter and OPEC would become rather less important in the world. That's a solution that I can live with.

There may well be systempunkt attacks that cannot be defended against via defensive system resilience but $100 oil simply isn't one of them. For $100 oil to be a problem, the environmentalists would have to succeed in stopping F-T construction long enough to collapse our economy.

[John Robb]

TM, it all comes down to time. The chance that recession will hit and lower demand (and the price) keeps investors away. They have been burned in the past by investing in alternatives with a 2-3 year lead time only to find the price below break even by the time they finished.

[Marcello]

"If we are far sighted enough to create an automatic trigger that changes the legal environment so that a terrorist systempunkt attack would immediately enable F-T plant construction on a national emergency basis"

The problem is that facilities like that are not built in an overnight.
How long would it take to build a sufficient number of those synthetic fuel plants?
I am guessing but it would probably be a matter of many months,even few years to reach sufficient capacity.Bottlenecks may limit then number of facilities in construction at any given moment.
Reserves will be probably depleted before then.

[Adam]

John,

Meant to reply last night. Couldn't find the reference I was looking for (it was late, I was tired)... Anyway I'd note that getting oil to $100 US dollars a barrel is a specific war-aim of Bin Ladens.

On 16 December 2004 Bin Laden said: "Remember that the biggest reason for our enemies control over our lands is to steal our oil, so give everything you can to stop the greatest theft of oil in history from current and future generations... But oil, which is the basis of all industry, has gone down in price many times. After it was going for $40 a barrel two decades ago, in the last decade it went for as little as $9, while its price today should be $100 at the very least. So keep on struggling, do not make it easy for them, and focus your operations on it...for that will be the death of them" (Lawrence 2005: 272)

Therefore the oil industry is a major war target and so measuring the oil price is a clear indication of which side is winning.

In addition as has been noted Chavez wants oil to be fixed at $50 a barrel. This is in his interests but it will have interesting effects on OPEC. OPEC production rights within OPEC quotas are decided by barrels of reserves, no.1 at present is of course Saudi Arabia. But if $50 becomes the new target price then the heavy crude oil that Venezuela produces would become profitable to refine, giving Venezuela far greater reserves than Saudi and therefore more production rights. Fun fact: President Chavez hosts OPEC delegates in Caracas next month... Who wonders whats on the agenda?

[vox]

The price of oil and other real assets is more a measure of how rapidly the money supply, and more particularly, the supply of credit is exanding relative to growth in GDP. I don't see terrorists having any effect on the "flow of land" :-)

It's also a measure of a change in savings preferences and the increasing use of derivatives to manage risks.

Despite security concerns and supply disruptions, the global economy has shown a remarkable resilience in the form of large expansions in both credit and in the use of internationally networked markets for financial instruments.

I would be more concerned that without any impact from global guerrillas, that the current happy path of rapidly expanding credit reaches a point of excess, such that the credit supply suddenly contracts-- in which case the price of oil and many other real assets would fall.

[Veteran]

When Saudi King Abdullah recently declared to the Shura that he would "annihilate Al-Qaeda", he had crossed the 'Wadi ar-Rubicon.'

History has shown that when a wealthy potentate faced with a domestic insurgency rooted in the masses reaches the point of declaring that he will annihilate his domestic opponent, he is in trouble and it is he who gets deposed by those closest to him.

[Cliff Nickerson]

For those interested in oil (it should be all of you), you should read, "The Oil Factor" by Stephen and Donna Leeb. This is a book about investing, not warfare. The authors assert that the price of oil is never going to significantly bounce below $100 a barrel when it reaches that level because of economic forces early in the next decade. The book didn't consider this type of terrorism in their estimates.

And that FT oil will never be popular in the US. It will produce huge amounts of localized pollution and increase carbon emissions by a factor of two. Canada's tar sands are already starting to ramp up production. I imagine that the US would prefer to buy the oil from Canada than synthesize it themselves.

A big problem is that these systems wil be just as vulnerable to systempunkt attacks as petroleum. Energy needs to be produced locally. Tree-hugger energy like wind and solar will probably be a good first step since they don't produce weaponizable waste and they are harder to deactivate with individual attacks. (Replacing electric lines in much cheaper and faster than replacing pipelines.)

[John Robb]

Robb's First Rule of Superempowerment.

Of course, the mechanisms of emergent intelligence and open source innovation both provide a way to reach high levels of organizational intelligence without any individual brilliance.

[TM Lutas]

John Robb - The extraction price of FT is $32/bbl equivalent to get to refined product. A 500-1000 bbl/day plant according to the DOE will run $25M to create. It will produce between 5,840,000-11,680,000 gallons of gasoline per year at $1/gal. $100/bbl oil means gas hits $5 a gallon. You don't need more than 2 years to make your money back at that price level and you're profitable anywhere north of, say $35/bbl oil (figuring in cost of capital). Look up GTL in a can to get more details. It's a modular, fieldable plant that is especially profitable at low throughputs (up to 9k bbl/day) which means that they are not especially attractive targets for terrorism.

Essentially, a large number of big US businesses as well as governments could afford to sponsor plants like this to provide energy security for their operations. Government guarantees to pick up a healthy part of the unpaid for portion of the plants if energy prices crater would make it safe enough to invest in a different kind of strategic reserve.

Marcello - The 2005 DOE report that I'm pulling my data from is talking about plants that are modularized and relocatable. In other words, you can drag those puppies around from stranded gas field to field and create clean fuels at affordable prices. Alaska seems like a good market in the report since its prices are double what we have in the lower 48. That's likely going to be an interesting test market.

I've no doubt that reserves will be depleted before F-T plants can entirely save the day but the point is to turn a disaster into something survivable, not to eliminate all pain. If we wanted to do that, we'd just build 3000 plants @ $75B in cost and warehouse them to give us 3 million BBL /day production capacity off of domestic sources and reserve $7.5B for each year we anticipate operating them in future budgets.

Instead, the question is what balance should be struck between pre-building these things, auto-legislating their purchase at time of systempunkt created crisis, and just letting people suffer? The solution is there. If we provide a modicum of future planning, we can avoid massive damage to the world economic system, the entire point of systempunkt attacks.

Cliff Nickerson - When you have a stable environment of $100/bbl oil and a ready substitute supply of energy feedstock that is extractable for a couple of centuries @ $32/bbl equivalent, that substitute is going to come on line and it's going to drive down the consolidated liquid fuels market (conventional gasoline/diesel and FT gasoline/diesel) to a point very close to the lower price bound.

[SaturnV]

"When you have a stable environment of $100/bbl oil and a ready substitute supply of energy feedstock that is extractable for a couple of centuries @ $32/bbl equivalent, that substitute is going to come on line and it's going to drive down the consolidated liquid fuels market (conventional gasoline/diesel and FT gasoline/diesel) to a point very close to the lower price bound."

Environment will be unstable as we run current arrangements on cheap oil infrastructure, inflation will rise as cheap oil depletes - prices will not be stable
Cost of energy will increase substantially as cheap oil depletes because coal/tar/shale and other alternatives are less energy dense so we will have to use increasingly more energy to make a boe as time goes by
Following on from this less energy will be left over (net energy) to do uselful things with like grow the economy
Energy feedstocks will be depleted faster because of additional demand so won't last a "couple of centuries"
Alternative feedstocks cannot be ramped as quickly as conventional oil production (mined not tapped), so liquid fuel flows are reduced
What about increased C02 emmissions, sundry pollutants, other environmental factors?

[dan]

TM

The US imports approx. 10 million bpd of crude oil and about 3.5 - 4 million bpd of refined products. At present, AFAIK, there is only one F-T plant ( c. 10,000 bpd production capacity ) in the US - in Montana, which is coal country. It's all very well having portable plant that can utilise stranded gas - but it needs to be co-located with your supply of coal, otherwise you need to develop an infrastructure to bring your coal to the stranded gas; this ain't cheap - how exactly are you gonna get your coal to Alaska?

It's also worth noting that prices of coal, natural gas and electricity have increased quite markedly in recent years - so the $32 price-point that you cite is not fixed, but dependent on input prices that are subject to inflation.

FWIW it would take about 1300 of these plants to substitute for the current level of US imports - although F-T is mostly good for producing diesel - so there is zero chance of the US becoming an energy exporter on the back of this, unless US aggregate consumption falls by an unprecedented percentage.

The price of light-sweet oil has been above $40 since 2004 and the 5-year futures are all above $60 per barrel. The heavier grades are all trading above $50 per barrel at present, yet not one plant has been commissioned at a price point that is supposedly profitable. The private sector shows little interest in investing money in this, and the Federal government doesn't have any cash to throw around - so where is the investment going to come from?

In the end there isn't a supply-side solution to the US's energy dilemmas - it will require a combination of conservation, efficiency and demand management. All of these are far, far cheaper options than spending $75 billion to substitute for 20% of US imports.

[Marcello]

"If we wanted to do that, we'd just build 3000 plants @ $75B in cost and warehouse them"

Which is more or less my point.No sane profit driven entity will build many hundreds of very expensive units to have then sitting in some warehouse in the eventuality that they might come of use at some point in the future.
By when it will become profitable to do so, it will be probably be impossible to mass produce them in few months,as assembling things like that probably require tools and specialized personnel whose number is based around a certain level of demand and cannot be quickly increased to cope with such massive orders.
Coal extraction/transportation may be a further bottleneck:is there a massive unused capacity for that? If not that means more equipment which will have to be built, again probbably with tools and specialized personnel.
The only remedy would be government intervention to finance the construction in advance of such things.As we are speaking about an investment of many billions that does not seem very likely in the current budgetary environment.

[Adam]

$75bn loaned at 5% comes to $3.75bn a year interest (assume that the captial isn't repaid). Not sure what the depreciation on plant is but we'll call it another 5% a year (20 year life expectancy).

Therefore total cost for warehousing, before warehouse costs = $ 7.5 bn.

Roughly the payroll cost of the entire US Marine Corps, or a year of SDI research.

[TM Lutas]

SaturnV - When you're talking about $100 oil, it's generally implied that it's constant dollars. If there's more inflation, that's going to favor the guys borrowing money to pay for these plants because they'll be paying back in inflated dollars. A stable $100/bbl environment is an environment where a systempunkt attack or series of attacks has driven down supply for several years. This is the economic nightmare that John Robb has been pointing to time and time again.

The plan I outlined would substantially remedy such attacks by creating a replicable formula for countering those attacks and a legal framework so that things would automatically swing into effect as a matter of national security.

We're really on the dusp of some neat, new stuff coming online. The FT phase, if it gets triggered at all, will be a bandaid to carry us past the danger point of a heterogeneous hydrogen economy. Depletion of coal is thus not an issue.

dan - Do you seriously think that *all* import sources will be simultaneously offline due to systempunkt attacks? That's just not realistic. Even the 3M bpd figure is something that is barely possible because of the centralization of KSA infrastructure.

You're also misunderstanding the system. GTL-in-a-can does not use coal. The coal plants are larger and are even better economic bargains. GTL-in-a-can has the advantage of fast deployment by prebuilding for deployment in case of emergency.

The problem of the coal FT plants is that they have a dirty reputation and thus a heavy hidden cost. Sasol can do it because the South African police weren't going to let a bunch of greens collapse the economy. The US has a different legal environment which is usually good but makes it difficult to deploy new energy plants of any type, much less coal ones.

Marcello - The plan I outlined was to do it as a government project along the lines of the strategic oil reserves in salt domes. You could also get a more private oriented program by supplying guarantees on investment return but that would leave more of a gap between crisis and resolution. The point I'm making is that there *is* a supply solution, we *can* prepare for a systempunkt style disruption, and if we can get past John Robb's gloom and doom, we might have some very interesting discussions on how best to proceed.

Adam - Mothballed plants do not depreciate normally. Other than that, I've no quibble with your figures. The question really is how risky is John Robb's energy infrastructure systempunkt? How much should we be willing to buy supply side insurance? Is that figure lower or higher than the carrying cost of a mothballed solution?

[Adam]

"Mothballed plants do not depreciate normally. Other than that, I've no quibble with your figures. The question really is how risky is John Robb's energy infrastructure systempunkt? How much should we be willing to buy supply side insurance? Is that figure lower or higher than the carrying cost of a mothballed solution?"

TM,

Its been a while since Foundation Stage Accounting but all assests are subject to depreciation over time due to obsolescence (the "stuff we bought 30 years ago just doesn't work as well as new stuff" rule).

Other than that the answers are:
1) Bad, but not unbeatable. It'll merely knock the stuffing out of the economies of the industrial nations and their ability to make war
2) Who knows, but I'm willing to bet that at less than $8bn a year Lloyds of London would do a policy
3) Spending 10% of the bloated US defence budget on toys is, well, actually its business as usual. These'll be more useful than the F-22, so why not? I've just realised that this isn't a bad point, merely a bloody expensive one.

Let the world tremble... I'm starting to see your point...

[TM Lutas]

Adam - Thank you.

I don't pretend that this solution is anything more than a conversation starter. Build and mothball would be the most inefficient use of resources and, from a national security emergency standpoint it wouldn't be entirely out of the realm of the possible but, we agree, very expensive.

A cheaper alternative might be to figure out the differential between commercially viable pricing and the cost of the things and making up the difference in a national security reserve policy. The only problem would be if these new sources of supply drive other suppliers out of the market.

As to depreciation, I wasn't saying that they wouldn't depreciate, but that they wouldn't depreciate normally (ie they'd have a higher lifetime figure than normal due to parts being kept in lubricant and other life extension measures).