Saturday, January 28, 2006

Planning for the Next Oil Crisis

Fortune Magazine reports about a session at the Davos World Economic Forum on scenarios for possible oil crises in the near future. Bill Browder of Hermitage Capital and George Soros led the session. Soros was particulalry concerned that U.S. over-reach in Iraq would further embolden countries such as Iran that want to overturn the current order. While the hegemon's away, the rogues will play.

Browder, for his part, set out a series of scenarios:

To come up with some likely scenarios in the event of an international crisis, [Browder’s] team performed what's known as a regression analysis, extrapolating the numbers from past oil shocks and then using them to calculate what might happen when the supply from an oil-producing country was cut off in six different situations. The fall of the House of Saud seems the most far-fetched of the six possibilities, and it's the one that generates that $262 a barrel.

More realistic -- and therefore more chilling -- would be the scenario where Iran declares an oil embargo a la OPEC in 1973, which Browder thinks could cause oil to double to $131 a barrel. Other outcomes include an embargo by Venezuelan strongman Hugo Chavez ($111 a barrel), civil war in Nigeria ($98 a barrel), unrest and violence in Algeria ($79 a barrel) and major attacks on infrastructure by the insurgency in Iraq ($88 a barrel).

Regressions analysis may be mathematical but it's an art, not a science. And some of these scenarios are quite dubious, like Venezuela shutting the spigot.

Although all admit that none of these scenarios is especially likely, it is important to nonetheless plan in case any of these events occur. Unfortunately, forward planning has not proven to be one of the current administration’s strong points.

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