Risk Mitigation
In this issue
we look at the risk of terrorist attacks. For an energy
consumer that translates to price risk as a result of supply
disruptions. The impact and duration would likely be similar
to what might be expected from a major hurricane damaging the
energy infrastructure in the Gulf of Mexico. Energy prices are currently at
52-week lows, so this is a good buying opportunity for at least some of
your natural gas and/or electric needs. Buying energy in
increments during market dips is a simple and effective risk management
technique. For energy suppliers, their risk mitigation strategy
includes diversifying the geographical locations of their supply
sources, so that a single incident does not create too much
damage. There are many types of risk,
each worthy of detailed analysis. It is also important to realize that
not all risks manifest themselves in the same way. For
example, in today's bad economy, credit risk and operational risk are
just as important as price risk. The terms and conditions
of a supply contract can also place an uninformed consumer at great
risk. Contact Independent Energy
Consultants for your energy sourcing and risk management
needs.
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Your
Energy Manager
Topic: New Administration = New Risks?
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Welcome, 
Independent Energy Consultants, Inc. is committed
to helping its clients make
well-informed and cost-effective decisions regarding
their energy supply and consumption. We are
sending you this newsletter to help you understand how decisions that
are made, or not made, effect your company's bottom line.
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Bold Prediction
During
the recent presidential election campaign,
Vice
President-elect, Joe Biden, made an unprompted and remarkable statement
concerning America's safety in the coming months. Mr. Biden,
Chairman of the U.S. Foreign Relations Committee, said, (paraphrasing)
America would be tested in the first six months of
an Obama presidency, simply because some of our
enemies perceived
him as
inexperienced
and possibly weak on defense. I am guessing similar
statements
could be made about most new presidents, and Mr. Biden did go on to say
that he thougt the new president was up to the challenge. Putting
your personal politics and Mr. Biden's possible political motives
aside, his
statement grabs your attention and will be the topic of this month's
news
letter.
If
I let my imagination run wild, I am sure I could come up with
20 scenarios that include nuclear attacks, bio-terrorism and financial
terrorism that our
enemies have already considered. Since I am an energy
consultant, and not a fiction writer, I will focus on known targets
that could send
energy prices back through the roof and even change how we live our
lives.
To
begin, let me state for the record, that terrorism
against the U.S. and/or the World's energy infrastructure is not a new
threat. Many countries, including our
own, have experienced and thwarted attacks on our free market access to
energy
products. For purposes of our discussion
we will look at terrorism attacks and vulnerable locations around the
world. Many of the attacks can be traced back to when the
Shaw of
Iran was overthrown in 1979. That
watershed event ended Iran's monarchy system that dated back to the
16th
century, and seems to have emboldened terrorists ever since.
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Possible
Targets
The U.S. Energy
Information Agency (EIA) devotes many
resources to chronicling energy-related incidents of terrorism, and
forecasting
their potential impact on energy prices and our economy. We
only
need to look back five months to see the devastating impacts
$150/barrel crude oil had on the world's economies. While
that recent step jump in energy prices was caused by speculators and
not an act of terrorism, we felt its tremendous ripple effect in the
cost of everything we purchase. Those high energy prices were
a major contributor to the recessions now spanning the globe.
Shown below is an enlightening table, reproduced
from EIA sources, that identifies the most likely "chokepoints" for
someone wanting to
impact crude oil supply. This is important, because, as the
price of
crude oil goes, so do all the other competing energy fuel sources.
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Important
World Oil Transit Chokepoints
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Name
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2006
Est. oil flow (bbl/d)
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Width
at Narrowest Point
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Oil
Source Origin
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Primary
Destination
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Past
Disturbances
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Alternative
Routes
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The Strait of Hormuz
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16.5-17
million
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21
miles
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Persian
Gulf Nations including Saudi Arabia, Iran and UAE
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Japan,
The United States, Western Europe, other Asian countries
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Sea
mines were installed during the Iran-Iraq War in the 1980s. Terrorist
threats
post 9/11/2001.
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745-mile
long East-West pipeline through Saudi Arabia to the Red Sea.
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The Strait of Malacca
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15
million
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1.7
miles
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Persian
Gulf Nations, West Africa
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All
Asia/Pacific consumers including Japan and China
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Disruptions
from pirates are a constant threat, including a terrorist attack in
2003. Collisions and oil spills are also a problem. Poor
visibility
from smoke haze
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Reroute
through the Lombok or Sunda Strait in Indonesia. Possible pipeline
construction between Malaysia and Thailand.
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The Suez Canal
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4.5
million
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1,000
feet
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Persian
Gulf Nations, especially Saudi Arabia, and Asia
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Europe
and the United States
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Suez
Canal was closed for eight years after the Six Day War in 1967. Two
large oil
tankers ran aground in 2007 suspending traffic.
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Reroute
around the southern tip of Africa (the Cape of Good Hope); additional
6,000
miles
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Bab el-Mandab
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3.3
million
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18
miles
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The
Persian Gulf
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Europe
and the United States
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USS
Cole
attack in 2000, French oil tanker in 2002, both attacks off the coast
of
Aden, Yemen
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Northbound
traffic can use the East-West oil pipeline through Saudi Arabia.
Reroute
around the southern tip of Africa (the Cape of Good Hope); additional
6,000
miles
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The Turkish Straits
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2.4
million
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0.5
mile
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Caspian
Sea Region
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Western
and Southern Europe
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Numerous
past shipping accidents due to the straits sinuous geography. Some
terrorist
threats were made after 9/11/2001.
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No
clear
alternative; potential pipelines discussed including a 173-mile
pipeline
between Russia, Bulgaria and Greece.
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The Panama Canal
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0.5
million
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110
feet
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The
United States
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The
United States, and other Central American countries
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Suspected
terrorist target.
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Reroute
around the Straits of Magellan, Cape Horn and Drake passage; additional
8,000
miles.
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An
examination of recent data pegs the total world oil
production to be approximately 85 million barrels per day
(bbl/d). Further review shows that over half (43
million bbl/d) of that oil is delivered by seagoing tankers on known
maritime
routes. Taking this one step further we
see from the chart that over 60% of the world's oil flow passes through
the
Strait of Hormuz and the Strait of Malacca.
The Strait of Hormuz leads oil tankers out of the Persian Gulf and the
Strait of Malacca links the Indian and Pacific Oceans.
Iran has
said on numerous occasions, that if attacked by Israel, one of
their first actions will be to seize control of the Strait of Hormuz.
This is important, simply because our energy markets are
dependent upon predictable and timely shipments. The blockage of a
chokepoint,
even temporarily, can cause prices to skyrocket. The narrow
chokepoints make tankers an easy
target for terrorists and military attacks in time of war.
There has also been a spike in piracy around the
world. Over 100 tankers have been seized this year on the
high seas, many off the coast of Somalia. With Ransoms
approaching $30 million, and being paid, we can expect this trend to
increase until military action is taken.
Oil
is not the only energy target and the hotspots are not contained to the
Middle East. Mother Russia sits on 90 percent of the world's
natural gas reserves. Five months ago the wholesale price of
natural gas was over $14/Dth, today it is trading below
$6/Dth. Natural gas and oil are both key exports from Russia
and their plummeting prices have dealt a major blow to Russia's
economy. With Prime Minister Vladimir Putin showing signs of
reverting to former communist ways, we can expect to see more
aggression like their war with Georgia earlier this summer.
In
that
conflict, Putin went so far as to accuse the U.S. of creating the
crisis and even arming the Georgian army. It is obvious that
the cold war hostilities are not forgotten. We will
have to wait and see if an Obama presidency is viewed by Russia as an
opportunity to resume their aggressive use of military power.
These
are
all targets outside of the United States that could be vulnerable and
cause major problems worldwide, but what about inside our
borders? If terrorists can hit the heart of our financial
system and our Pentagon with loaded 767 jets, it is not unthinkable
that they have designs on our nuclear power plants, refineries, major
electrical transmission lines and gas and oil pipelines.
Let's hope Mr. Biden's terrorism prediction never comes to pass,
whether it be in a subway, airport, football stadium, shopping mall,
cyberspace or to our energy infrastructure. While we put our faith in
the brave men and women of our military and our Homeland Security
Department, it is your job to
understand and manage your energy
risks.
Contact Independent Energy
Consultants for help with all your all energy sourcing and
risk management needs. |
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