TPMCafe || Oil Shockwave: "The events were not in the realm of the fantastic -- as Gates said after the game was through, 'the scenarios portrayed were absolutely not alarmist; they're realistic.' They included ethnic unrest in Nigeria, an al-Qaeda attack on a natural gas facility in Saudi Arabia and at the oil terminal in Valdez, Alaska, and further attacks against expats in Saudi Arabia that results in a mass exodus of these critically important workers.
"As the scenario played out, the price of a barrel of oil leapt to $80 a barrel then $100, then $150. Price per gallon broke $5, and the cost to fill up your mid-size SUV broke $100. The economic effects were devastating -- more than 2 million jobs lost in 2007 (largest single yearly loss since 1945), average annual gas costs per household spiking to $5,800 a year, a recession, and 28 percent drop in the S&P 500. Not a pretty picture.
"These events had such a huge effect because there is almost no slack in the global market for oil -- and, importantly, the only swing capacity is in the hands of the Saudis. If they don't want to play ball or a situation arises in which they can't, then basically, we're screwed."
The primary reason the world is in a no-slack situation is that the world is moving very, very close to Hubbert's peak, the point at which it will simply not be possible to increase oil production from year to year. Demand, of course, continues to increase.
The secondary reason is the War in Iraq. Iraq sits atop a lot of oil, but is producing very little. And, whose fault is that?