Review of CNA Report: “Powering America’s Defense: Energy and the Risks to National Security” (May 2009)

This report was issued by the Center for Naval Analyses’ Military Advisory Board, which consists of a dozen retired senior military officers.

Powering America’s Defense comes two years after the Military Advisory Board’s landmark report, “Climate Change” (May, 2007). This review of Powering will examine the way its authors deal with the issues of peak oil, oil imports and the potential for oil supply shocks.

A. Peak Oil

With respect to peak oil, Powering refers to the 2007 GAO report, “Addressing a Peak and Decline in Oil Production” [1] and makes specific reference to the GAO’s conclusion that “the peak in production is likely to occur some time before 2040” [2].

Powering then refers to the recent World Energy Outlook (WEO, Nov. 2008) and states, “According to the International Energy Agency (IEA) most countries outside of the Middle East have already peaked, or will soon reach, the peak of their oil production” [3].

However, Powering does not include some of the most compelling information contained in the 2008 WEO:

– its acknowledgement that oilfield decline rates are much worse than was previously recognized [4],

– its warning of an oil-supply crunch by 2015 unless there is a major surge in investment [5],

– its marked shift in tone from previous WEOs [6].

The 2008 WEO states, “Production has already peaked in most non-OPEC countries and will peak in most others before 2030” [7].

When the IEA’s Fatih Birol, was questioned on this pre-2030 time-frame, he conceded, “Assuming that OPEC will invest in a timely manner, global conventional oil can still continue [to increase] but we still expect that it will come around 2020 to a plateau, which of course is not good news for global oil supply. “

Birol went on to say, “The reason we are asking for a global energy revolution is to prepare everybody for difficult days and difficult times. I think we should be very careful…” [8]

To summarize, the Chief Economist of the IEA has verbally indicated that the global peak (which the GAO thought might occur as late as 2040, and which the WEO indicated might be “before 2030” has now been brought forward to an anticipated plateau a mere decade from now.

If Mr. Birol is correct, such a scenario greatly reduces the previously expected mitigation time.

The importance of the mitigation time is emphasized repeatedly in the landmark 2005 Hirsch Report (which the authors of Powering also overlooked).

Dr. Hirsch’s conclusions are summarized in three excerpts from his powerful opening paragraph:

The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem

Without timely mitigation, the economic, social and political costs will be unprecedented.

To have a substantial impact, [mitigation] must be initiated more than a decade in advance of peaking” [9].

Later in his report, Hirsch states “Initiating a mitigation crash program 20 years before peaking appears to offer the possibility of avoiding a liquid fuels shortfall for the forecast period” [10].

If both Birol and Hirsch are correct (that we need two decades pre-peak for mitigation, but may have only one decade), then our situation could be much more serious than is indicated in Powering.

B. Oil Imports and Export Decline

As the authors of Powering point out, “Moving beyond recent studies on the dangers of imported oil, this 2009 report finds that fossil fuels, as well as the nation’s fragile electricity grid, pose significant security threats… [11].

This is a prudent observation, but the authors might have further explored two frequently overlooked considerations.

First is the contradiction inherent in the popular notion that the USA can achieve “energy independence” by exploiting its precious remaining reserves in order to reduce imports.

From a long-term energy security perspective, it should make more sense to consume someone else’s oil and safeguard one’s own (within the constraints required to maintain a viable and responsive domestic industry).

Second is the threat of export decline, and here also the Advisory Board has overlooked some recent and highly relevant warnings.

Robert Hirsch, Jeffrey Brown and Jeff Rubin have all highlighted the fact that global oil exports must necessarily peak and decline within the larger production curve (since one cannot export oil which has not been produced). Whether exports are curtailed because of depletion, growing domestic demand, or for voluntary reasons (an exporter may choose to conserve for its own future generations, to await a better price, etc) the result will eventually be an increasingly constricted export market.

For these reasons, the export decline-curve is likely to be more precipitous than the overall production decline curve [12].

This concept belies the prevailing ‘’solution’ to the energy insecurity of importing nations, which is to simply “diversify sources of supply.”

The number of nations with export capability continues to decline, so diversifying one’s source of oil imports may be more difficult in the future.

C. The Danger of Oil Shocks

Although Powering includes a reference to the first of the al-Qaida efforts to damage the vital Saudi complex at Abqaiq, it makes no mention of the top-level Oil Shockwave exercise which was conducted in June 2005 and which is highly relevant to an analysis of U.S. energy security, particularly one conducted by military analysts.

The Oil Shockwave simulation involved nine veteran administrators including Robert Gates, Richard Haass, James Woolsey, Robert Rubin and Gen. P. X. Kelley USMC (Ret’d).

Their conclusions were stark: the loss of only 4% of global oil production could result in a near-tripling of its price, short-term options to protect the economy were limited and not sustainable, and “military intervention was not only unfeasible… but unlikely to be effective” [13].

The Shockwave simulation did not include damage to Saudi facilities, which led James Woolsey to correctly point out that the scenario evaluated in Shockwave was “relatively mild compared to what is possible” [14].

Robert Gates further warned, “The real lesson here is that it only requires a relatively small amount of oil to be taken out for the system to have huge economic and security implications…. The threat is real and urgent, requiring immediate and sustained attention at the highest levels of government” [15].

A central conclusion of the Shockwave exercise was that a severe price spike in the price of oil would inflict serious (and quite unavoidable) economic damage. Although the authors of Powering clearly note the threat of escalating energy costs [16], they have quite overlooked the potential for a severe oil shock and the very serious implications of such an event.

To their credit, however, the Board offers two relevant recommendations on the general issue of energy supply risks:

a) to ensure that the national security planning process and the resulting strategies “more realistically describe the nature of the threat [of energy-related risks]… “ and

b) to ensure that specific training exercises “…realistically incorporate the strategic and tactical risks associated with energy supply disruptions…” [17].

On a broader point, the authors of Powering point to what others have called “the end of cheap fossil fuel”: “These factors – the finite supply of fossil fuels, the increased demand for fossil fuels, expected regulatory costs associated with carbon emissions – suggest the onset of a carbon-constrained global economy” [18].

However, the tone of Powering is hardly one of urgency. Its authors predict that “the global supplies of fossil fuels begin to plateau and diminish in the long term” [19] and that there will be “a long-term constriction in the world’s oil supply” [20].

Most striking of all is their confident statement on the final page: “In the near-term, the Department of Defense is not faced with a threat to its liquid petroleum fuel supply” [21]. However, as Powering itself indicates, price spikes and price volatility can play havoc with our economy and therefore with the budgets for military and other public services which are funded by that economy.

As the Oil Shockwave report strongly stated, the threat of a sudden oil shock is absolutely real and urgent. Furthermore, both Powering and Shockwave concur in the view that “U.S. exposure to such price shocks has nothing to do with how much oil we import” [22].

Contrary to what Powering states, one could sensibly argue that in fact DoD faces increasing near-term threats to its supply of affordable liquid fuels.

D. Unaddressed Concerns

Powering gives little indication that its authors have examined the evidence which has prompted other analysts to adopt a tone of greater urgency.

a. Crash mitigation program

The Hirsch Report emphasizes the narrow pre-peak time frame that we may have to work within. It recommends “a crash mitigation program” [23]. Our unprecedented problem is not simply one of quickly finding a technological break-through for low-carbon energy sources. The related problems of investment, infrastructure and deliverability are formidable in their scale and may require much longer time-lines.

b. Net energy

Powering should also have acknowledged the net-energy gap which exists between the traditional pumping of conventional oil and the challenges of ultra-deep water, mining bitumen or squeezing oil from shale. The net energy return from unconventional sources is likely to be significantly lower than the net energy ratios which were enjoyed during the last century [24].

c. Near-term supply crunch

The latest information from the IEA indicates that the future supply situation may be much more precarious than the Agency had previously acknowledged. Powering includes reference to the IEA’s statement that we need to find and bring on-stream the equivalent of six Saudi Arabias… all by 2030 [25]. This is a stunning statement, and one wonders if the IEA is not hinting that the public (and especially policy makers) should read between the lines.

But Powering offers no hint of disbelief, no concern that there might not be six Saudi Arabias to be found, much less developed that quickly.

Indeed, IEA Deputy Executive Director Richard H. Jones stated during his April 09 presentation at the Turkish War Colleges, “Who thinks we’re going to be able to find and develop seven [sic] Saudi Arabias in 22 years? Our BAU [business as usual]scenario is very probably unsustainable from a security of supply point of view!” [26]

There was also no acknowledgement of the recent warnings from Chatham House and the IEA of the potential for a near-term oil supply crunch between 2011- 2015 [27].

The increasing concerns about export decline should have import-dependent regions in particular rethinking their existing strategies and examining realistic options.

d. Plans for fuel emergencies

If the Advisory Board had examined the existing plans to manage fuel emergencies (from the IEA right down to the municipal level), they would surely discover serious deficiencies in those plans. During a major supply crunch these deficiencies could potentially magnify the economic damage, reduce the capacity of first responders and the military, and invite domestic disorder.

E. Conclusion

For all these reasons, the Board may wish to reconsider its remarkable confidence that DoD can be assured of a steady supply of affordable oil in the near term.

Indeed, a new Brookings study warns that DoD may “face particularly acute issues surrounding petroleum access and fuel costs” [28].

It also points to energy supply as one of “the systemic challenges that threaten to undermine [DoD capabilities] from below” [29].

Despite its shortcomings, Powering is a useful contribution to the energy security literature. It clearly twins two colossal issues of the 21^st Century: energy supply and climate change.

Its authors further state that “the best approaches to energy, climate change, and national security may be one and the same” [30]. They further provide specific and practical suggestions as to how DoD might prioritize and proceed in that direction.

Powering’s most insightful statement, though, may be this:

“Both the defense and civilian systems have been based on dangerous assumptions about the availability, price and security of oil and other fossil fuel supplies. It is time to abandon those assumptions” [31, emphasis added].

Perhaps CNA will undertake a subsequent study, one which will expose those dangerous assumptions and bring the Military Advisory Board’s considerable expertise to bear on vital aspects of energy security which remain relatively overlooked: export decline, net energy, flow rates & deliverability, and government plans for fuel emergencies.

The entire CNA report may be found here:

http://www.cna.org/documents/poweringamericasdefense.pdf

References

1. United States Government Accountability Office, Crude Oil: Uncertainty about Future Oil Supply Makes It Important to Develop a Strategy for Addressing a Peak and Decline in Oil Production, Feb. 2007 (82 pgs).

2. Powering, p. 18.

3. Powering, p. 18

4. The 2007 WEO predicted a rate of decline in the output from existing oilfields of 3.7%. But the 2008 WEO states, “We estimate that the average production weighted observed decline rate worldwide is currently 6.7% for fields that have passed their production peak” (p. 43).

5. Meanwhile, we have had the reverse of what is required: instead of increased investment, we have an ongoing list of postponements and cancellations.

6. One might describe the shift in tone as moving from confidence to one of urgency. The opening sentences of the Executive Summary set the tone: “The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable…” (WEO, p. 37).

This tone is reinforced by the warning in the final paragraph: “The world energy system will be transformed, but not necessarily in the way we would like to see…. Time is running out, and the time to act is now” (WEO, p. 49).

7. International Energy Agency, World Energy Outlook (Executive Summary), Nov. 2008, p. 41.

8. The video of Mr. Birol’s interview with George Monbiot (Nov. 2008) is available here:

http://www.guardian.co.uk/environment/video/2008/dec/15/fatih-birol-geor…

9. Hirsch, Robert et al., Peaking of World Oil Production: Impacts, Mitigation and Risk Management, SAIC, Feb. 2005, p. 4.

10. Hirsch, p. 65

11. Powering, p. vii.

12. A summary of the recent literature on export decline has
been posted at the internet forum of Armed Forces Journal (posting #7):

http://www.afji.com/forums/showthread.php?t=38380419

13. Oil Shockwave: Oil Crisis Executive Simulation, Securing America’s Future Energy (SAFE) and National Commission on Energy Policy, June 2005, p. 2.

This top-level Washington exercise examined the potential effects of the sudden loss of 4% of global oil production. Participants included Robert Gates, James Woolsey and Gen. P.X. Kelley (USMC, Ret). http://www.secureenergy.org/reports/oil_shock_report_master.pdf

14. Woolsey is quoted by Robbie Diamond in the latter’s House testimony, July 25, 2005, p.3.

http://www.internationalrelations.house.gov/archives/109/dia072705.pdf

15. Oil Shockwave, p. 1.

16. “Upward spikes in energy prices… constrict the economy in the short term, and undermine strategic planning in the long-term,”Powering, p. 11.

17. Powering, p. 44.

18. Powering, p. 19.

19. Powering, p. 38

20. Powering, p. 49.

21. Powering, p. 49.

22. Oil Shockwave, p. 7.

23. Hirsch, Appendix IV, p. 76-85.

24. The following cluster of internet submissions provides further information: