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One unintended consequence of the recent economic boom of China and India has been a major run up in oil demand and with it an erosion in the world’s spare production capacity. Since the 1970s, Saudi Arabia and other Persian Gulf producers held a cushion of 3-5 million barrels per day which were used to insulate the market against costly supply disruptions. When instability occurred in the Middle East, Africa or Venezuela and supply faltered, there was always someone to step in and pick up the slack. But in 2004, global spare capacity dropped to a dangerous level of under one million barrels per day making the oil market highly vulnerable. Any drop in supply, whether due to a hurricane in the Gulf of Mexico, riots in the Niger Delta or a terror attack in Iraq, sends prices to record levels. Terrorists who strive to weaken the Western economy have taken note of this development.

In various public statements, Osama bin Laden has mentioned economic warfare as the pillar of his strategy. He contends that it was economic pressure that brought the jihadists victory over the Soviets in Afghanistan during the 1980s and subsequently caused the fall of the Soviet empire. In his October 2004 tape he boasted: “We bled Russia for ten years until it went bankrupt and was forced to withdraw in defeat. […] We are continuing in the same policy to make America bleed to the point of bankruptcy.” [1] It was surely not the jihadists that brought the collapse of the Soviet Union, but this does not prevent al Qaeda from broadcasting a narrative that victory against the U.S. and its allies can be accomplished through a sustained campaign against the lifeline of the Western economy—its energy supply. “The killing of 10 American soldiers is nothing compared to the impact of the rise in oil prices on America and the disruption that it causes in the international economy,” declared one jihadi website in 2004. [2]

Such calls are now being increasingly heeded, and energy installations like pipelines, refineries and pumping stations have become terrorists’ targets of choice. The most active arena for this economic warfare is Iraq, where there have been close to 300 attacks since the end of major military operations in April 2003. [3] These attacks have strategic impact on U.S. efforts to stabilize the country. They undermine the prospects of Iraqi reconstruction by denying the Iraqi economy much needed oil revenues. They also have a corrosive influence on the morale of the Iraqis and their attitude toward the presence of U.S. forces in their country. Iraqis are growing increasingly vexed by the slow progress in the reconstruction effort and the inability of the government to guarantee a reliable supply of electricity, which in Iraq is primarily derived from oil. Worse, the sabotage campaign has created an inhospitable investment climate in Iraq and has scared away the international oil companies that were supposed to develop its oil and gas industry, which will be the country’s primary source of income for many years to come.

Outside of Iraq, attacks against oil targets have taken place in Nigeria, Pakistan, Sudan, Algeria, Turkey, Azerbaijan, Russia, Iran and Saudi Arabia. The cumulative impact of oil terrorism is profound. All together, terrorists have succeeded in denying the oil market more than a million barrels per day through sabotage alone. This at a time when oil is in very high demand. Had this oil been in the market, prices would have dropped by $15-$20 per barrel. This means that the jihadist campaign has been successful in diverting billions of dollars from the economies of oil consuming countries to those of the producers. Saudi Arabia earns extra half billion dollars per day in comparison to the 2001 prices, whereas Iran is raking extra 125 million. This terrorist premium has also contributed materially to record trade deficits and other economic adversities among the major oil consuming economies. [4]

High as the terrorist oil premium on global economy is, things can get much worse. One scenario the world economy cannot withstand is a major attack on one of Saudi Arabia’s oil facilities. The Saudi oil system is extremely vulnerable to terrorist acts. This is not only due to al Qaeda’s strong presence in the Kingdom and its ability to carry out coordinated attacks but also because of the concentration of large amounts of oil in a small number of strategic sites. For example, about two-thirds of Saudi Arabia's crude oil is processed in a single enormous facility called Abqaiq, 25 miles inland from the Gulf of Bahrain. Another strategic installation is the Ras Tanura terminal - the world's largest offshore oil loading facility, through which a tenth of global oil supply flows daily. A terrorist attack on each one of the hubs of the Saudi oil complex or a simultaneous attack on few of them is not a fictional scenario. In summer 2002, a group of Saudis was arrested for involvement in a plot to sabotage Ras Tanura and pipelines connected to it. In

Spring 2004, a series of attacks took place against oil employees in the Kingdom and in September 2005, Saudi security forces thwarted a group of jihadists intent on attacking Saudi oil facilities. A single terrorist cell hijacking an airplane in Kuwait or Dubai and crashing it into Abqaiq or Ras Tanura could turn the complex into an inferno. This could take up to 50% of Saudi oil off the market for at least six months and with it all of the world’s spare capacity. Such an attack could be more economically damaging than a dirty nuclear bomb set off in New York City. Since September 11 it has become apparent that there is no shortage of suicide terrorists who are willing to sacrifice their lives for the sake of denying the world economy its oil. On October 6, 2002, a suicide terrorist rammed a fast boat into the French oil tanker Limburg, off the coast of Yemen. On April 24, 2004 a group of suicide bombers in three boats blew themselves up in and around the Basra oil terminal in Iraq, one of the most heavily guarded facilities of its kind in the world.

The most effective way to address the scourge of sabotage is to confront terrorists wherever they are. By pursuing jihadists and separatist groups, denying them freedom of operation and destroying their infrastructure, the number of attacks could be greatly reduced. But wining the war on terrorism could take decades, while global demand for oil is only going to increase. Until terrorism is defeated, governments, oil companies and pipeline operators will have to put in place mechanisms to reduce the impact of the scourge. In Iraq more than 20,000 security guards have been deployed along the pipelines and in critical installations. The Iraqi government also provides financial incentives to tribal leaders in exchange for their protection of uninterrupted supply of oil running through their territory. Elsewhere, oil companies deploy a wide variety of technologies, including sophisticated ground and air surveillance systems, to reduce the success rate of saboteurs and mitigate the damage in case they succeed in carrying out their mission. These expensive remedies add a surcharge to the price of a barrel, which is already unusually high.

To compensate for the erosion in OPEC's spare capacity, major oil consuming countries can take steps to insulate their economies from supply disruptions by creating liquidity mechanisms of their own. At its current capacity of 700 million barrels the Strategic Petroleum Reserve (SPR) is sufficient to mitigate supply disruption to the U.S. market but it is not sufficient to tide the global economy over if there is a severe disruption of oil supplies. However, were the SPR expanded beyond its current capacity, and were Europe and Asia encouraged to establish similarly large oil banks, those strategic reserves could serve as a liquidity mechanism to replace that of OPEC's capacity. An expanded global reserve also would signal to the terrorists that the oil weapon can no longer be used against oil-consuming countries.

Finally, because of oil's role in the war on terror, it is important that Western economies do their utmost to reduce their dependence on petroleum. In the U.S. 97 percent of the energy used in the transportation sector is petroleum based. By shifting the sector from petroleum to next generation, non-petroleum based fuels such as ethanol, methanol, biodiesel, electricity and hydrogen and commercializing automobile technologies that can run on these fuels, industrialized countries can insulate their economies against supply disruptions. A coalition of national security and foreign policy think tanks, environmental and religious groups and labor unions called "Set America Free" has shown that through persistent national will and strong leadership the U.S. can cut oil imports by half within two decades by deploying available technologies. [5]

Undoubtedly, as long as the war on terrorism continues, oil terrorism will continue to be an important tenet of the jihadists’ strategy. With two thirds of the world oil reserves concentrated in the Middle East and with most of the world’s oil shipments passing through areas where radical Islamists are known to operate the world energy system will continue to be at the mercy of oil kamikazes determined to go for its jugular. If we stay on the present course, Western economies will bleed more dollars each year as the jihadists gather strength. A smart combination of military and energy policies is therefore our best hope for breaking the economic backbone of the jihadists before they do so to us.

Gal Luft is executive director of the Institute for the Analysis of Global Security (IAGS)

Notes:

1. Gal Luft, “Osama’s War on America’s Wealth,” Frontpage Magazine, December 15, 2004.

2. SITE Institute.

3. Iraq Pipeline Watch, Institute for the Analysis of Global Security, http://www.iags.org/iraqpipelinewatch.htm

4. “US Economy: Petroleum Imports Lead to Record Trade Deficit,” Bloomberg, November 10, 2005.

5. See: http://www.setamericafree.org