Lessons from 20 Years of Oil Crisis Simulations

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Oil shocks expose structural vulnerabilities, reinforcing that long-term energy security requires diversified supply, reduced dependence, and sustained investment. 

“The real lesson here is that it only requires a relatively small amount of oil to be taken out of the system to have huge economic and security implications.” Former Secretary of Defense Robert M. Gates made this observation during Oil Shockwave, a 2005 oil crisis simulation produced by the oil security nonprofit I founded in 2004, SAFE (formerly Securing America’s Future Energy). Since then, we have conducted similar simulations to give current and former government officials the opportunity to experience and prepare for the kinds of real-world challenges that the Trump administration is confronting today.  

Oil ShockWave placed a simulated Cabinet, typically composed of former Cabinet officials, into a rapidly evolving energy crisis, requiring them to make decisions and present recommendations to a fictional president. We developed scenarios ranging from terrorist attacks on tankers in the Bosphorus Strait to instability in Nigeria and Saudi Arabia, and to disruptions in the Strait of Hormuz, similar to what we are seeing today. Across all these exercises, we gained valuable insight as to how the United States might respond to the current situation and what America can do going forward. 

Oil Market Volatility and Global Price Interdependence 

Compared to 2005 and even 1973, the United States is in a far stronger position to weather the current situation. But no matter how energy “independent” or “dominant” we become, one fact remains unavoidable. Disruptions in the oil market anywhere affect the price of oil everywhere. The price of crude oil, even when produced domestically, is determined in a global market. Moreover, oil remains the lifeblood of a global mobile economy, so every country and its economy will feel the impact—some in terms of physical supply and everyone in terms of price.

The volatility of oil prices, unlike that of almost any other commodity or product, makes it unique and particularly challenging. Oil prices can swing sharply due to geopolitics, weather, or the coordinated efforts of the Organization of the Petroleum Exporting Countries (OPEC), which operates as an illegal cartel according to US law. Companies that make long-term investment decisions, from automakers shaping the character of their fleet, to airlines deciding which routes to fly or which planes to use, or industries that consume petrochemicals for plastics, fibers, solvents, and more, can operate with $50 or $130 oil. But the decisions they would make, and the companies they would build, would look quite different under different price scenarios. The volatility of oil prices complicates business planning in a way that few other things do.  

Oil Shockwave revealed another important lesson: once a crisis begins, it is too late to meaningfully address oil dependence. Participants consistently concluded that earlier action by policymakers would have made the greatest difference, and that it was unfortunate that Congress and previous presidents had not acted before crises occurred.   In the short term, governments cannot quickly increase global supply or significantly reduce demand. Real........

© The National Interest