Quote Originally Posted by Bill Moore View Post
Lastdingo,

We get our oil from numerous countries such as Nigeria (another stable garden spot), S. America, Mexico, Canada, the Middle East, etc. You can't compare the impact on the U.S. by determining which countries the U.S. buys it oil from today, because all countries buy from the global market. For example, if Saudi provided 30 bbl/day, Nigeria 10, Canada 15, Iraq 15, Mexico 10, Venezula 20, and terrorists reduced Saudi output by 50% (not that hard), that would equate to a 15% global decrease in oil production. I pulled these numbers out of you know where, so I think the real impact would be much greater than 20%, which is very significant. Most oil production countries listed cannot increase production to make up for the short fall. Many blame Saudi now for not producing more oil to lower the price (supply and demand), but several experts think it is physically impossible for Saudi to produce more. Regardless less output, less supply, greater demand, then greater prices. Oil prices impact every aspect of the economy to include foo production and distribution. The impact on emerging economies would be devastating. The loss of those markets for U.S. products due to inflation would hurt several U.S. businesses, and the nightmare scenario continues. This won't happen overnight, it can take up to 18 months for the 2d order effects to be realized. Our experts in the government realize this and are now taking aggressive measures to find alternative fuel sources such as nuclear, solar, etc. (bio fuels will prove to be a flop). Yet it takes 10 years to build a nuclear power plant. Right now we're the hostage.

The fact is that our global economy consists of several rapidly developing nations (not just China and India), and their demand for oil is increasing. The oil production system has little excess production capacity, so disruptions are serious economic events. Some disruptions are psychological, for instance if extremists take over Saudi, then oil prices will spike until the market determines if the extremists will still do business as normal. If they do then prices will settle back down, but the bottom line is the vast majority of the global oil supply comes from the Middle East and that is an unescapable strategic national interest whether we like it or not, and it means until we have another viable form of energy we'll have to continue to make deals with the devil.
All true, but there are other sides as well. By the way, I'm macro economist by trade to date.

The global oil market means that if Saudi Arabia decided not to deliver oil to state A, but instead to state B, state A would simpl buy the oil it needs from states wehre state B does not buy anymore. The overall ability to stage an oil embargo against the west is therefore limited. The prices would rise a bit, but the necessary oil would be available nevertheless.

Another aspect is that we're talking about grand strategy, and that should better be about the next 10 to 15 years, not short-sighted.
The oil price is already well above the price of substitutes like coal-based petroleum. The overall supply shortage in combination with expectation of rising demand means that the risk for investors is low when they invest in substitue production facilities.
It will happen, and can influence the situation in as little as five years. It takes two years to build the copy of an already existing chemical plant once planning stage is done.
There's always a reaction to an external shock, in civilian economy as in military affairs. We should not assume hat things will go on as they do today plus only bad shocks.
Finally, the state could simply lower taxes on mineral oil - that would translate external price shocks into budget deficits, thereby additional debts and this in turn would make people bear the load of the external shock who actually give lend money voluntarily. The shock wouldn't have the oil price-specific effects on the economy anymore.

Furthermore do I believe that you overestimate the potential impact of terrorists on oil supply. Have a look at the history of Algeria in the 90's. They had an overall supply reduction of max. about 30% despite a fierce civil war.
50% in the case of Saudi-Arabia would require demolition experts to blow up one or two oil ports despite the guards. And such damages could be repaired within few months, with even stronger guarding afterwards.