Scary Oil Prices

The National Commission on Energy Policy ran a simulation in June. Here is what they found. Be ready to break out the bicycles.

In a scenario confronted by the bipartisan panel of intelligence, military, and energy experts, a series of events over several months - unrest in Nigeria, an attack on an Alaskan oil facility, and the emergency evacuation of foreign nationals from Saudi Arabia - drives the price of oil to over $150 per barrel. These events lower expected employment levels by more than 2 million jobs, embolden countries that are major oil producers and consumers to pressure the U.S. on key foreign policy concerns, and cause a variety of other significant economic and security challenges.

The scenario removed only 3.5 million barrels of oil from a global market of more than 83 million barrels, resulting in the following consequences:

• Gasoline prices of $5.74 per gallon;
• Global oil price of $161 per barrel;
• Heating oil prices of $5.14 per gallon;
• Fall of gross domestic product for two consecutive quarters;
• Drop in consumer confidence by 30 percent;
• Spike in the consumer price index to 12.6 percent;
• Ballooning of the current accounts deficit to $1.087 trillion;
• Decline of 28 percent in the S&P 500;
• Aggressive pressure on the U.S. from China to end arm sales to Taiwan, and;
• Demands from Saudi Arabia for changes to U.S. policy regarding the Mid-East peace process.

• Once oil supply disruptions occur, there is little that can be done in the short term to protect the U.S. economy from its impacts, including gasoline above $5/ gallon and a sharp decline in economic growth potentially leading into a recession.

• There are a number of supply and demand-side policy options available that would significantly improve U.S. oil security. Benefits from these measures will take a decade or more to mature, and thus should be enacted as soon as possible.

• Supply-side measures include promoting developing of conventional oil reserves in nations currently off limits to private investment through enhanced U.S. diplomacy, increase research and development into environmentally-benign extraction of unconventional oil reserves such as oil shale and tar sands, and enable siting of new liquid natural gas and other energy facilities.

• Demand-side measures include promoting energy efficient passenger vehicles with incentives for hybrid electric vehicles , strengthen fuel economy standards, and increase research and development into plug-in hybrids and hydrogen fuel cell vehicles.

• Alternative fuel measures include increased research and development that enable ethanol production from plant materials, fischer-tropsch diesel from domestic coal, and hydrogen from coal and eventually from renewable sources.

"This simulation serves as a clear warning that even relatively small reductions in oil supply will result in tremendous national security and economic problems for the country," said SAFE President Robbie Diamond. "This issue deserves immediate attention."

"We can neither drill nor conserve our way out of this problem—we must do both," said Jason Grumet the Executive Director of the National Commission on Energy Policy. "The energy bill pending before the U.S. Senate is a significant step in the right direction but we must do much more to protect our economy from the risks of oil supply disruptions."