A PERFECT STORM
by Michael Meyer
Newsweek Internatiohnal
August 12, 2006

The BP spill's impact is minor compared to the potential disasters that could devastate the world economy.

Al Grillo / AP A BP employee uses ultrasound to look for weak spots in a section of pipeline in Alaska on Aug. 4

Aug. 9, 2006 - Could BP be a sign of thunderheads gathering for a potentially cataclysmic perfect storm?

At the Davos World Economic Forum earlier this year, big oil execs came together with some of the world's top government officials to play a game called "Oil Shock," featuring near-simultaneous attacks on oil facilities in Saudi Arabia, Alaska and Turkey. Terrorists sunk a freighter in the Bosphorus, linking the oil fields of Russia and the Caspian Sea to the Mediterranean and bottling up 3 million barrels per day of global crude supplies. A hit on the oil terminal in Valdez knocked out another million. An assault on the Saudi refinery and pipeline nexus at Ras Tanuras, the world's largest, was repelled but nonetheless some 4 million barrels of oil abruptly vanished from the market, amounting to 5 percent of global demand.

Oil prices in the simulation jumped instantly to $120 per barrel. Gasoline prices topped $5. Players in the game included the CEOs of several international oil majors, the head of the national oil company of one of the world's leading producers, the officials who run the U.S. and European strategic oil stockpiles, and the heads of several global banks. I was struck by how sanguine they were; by drawing down stockpiled reserves, the participants felt they could make up the shortfall in supplies—provided the disruptions lasted no more than four months. But afterwards, the head of a major Swiss insurer confided an important omission. The game didn't take account of the shock to the world's financial markets. "They would have imploded," he said.

This is merely a scenario, and probably not likely. And BP's troubles are not remotely as serious. Shutting down Prudhoe Bay entirely would cut 400,000 barrels per day, less than 3 percent of U.S. consumption. More importantly, the political dimension is entirely different; nature, not terrorism, is the cause. Still, gas and oil prices have risen sharply. The bigger question: what if something like this happened at the same time other crises broke?

Let's add two other elements to the BP equation—starting with, say, a terror attack. Ron Suskind's alarming new book, "The One Percent Doctrine," reveals that in 2003 the CIA by sheer fluke arrested a group of terrorists in Bahrain who had designed a mubtakkar, a remotely-activated device the size of a paint bucket that was, in essence, a portable gas chamber that could, at the flick of a switch, produce a cyanide gas resembling the Zyklon B used by the Nazis at Auschwitz. Worse, an operational Al Qaeda team appears to have already been in the United States with well laid-out plans to place canisters on subway trains and major railway stations in New York. "Oh s--t," said CIA chief George Tenet when he learned of it, according to Suskind's book. "The man has to see this."

In emergency meetings the next morning at the White House, George W. Bush was presented with a mock-up of the mubtakkar. "A nightmare," the president is said to have murmured, hefting it lightly. According to Suskind, the Al Qaeda team called off their New York attack some 45 days before its execution, allegedly on the orders of the organization's No. 2, Ayman al-Zawahiri. Why? No one knows, neither the CIA captives nor the informer who fingered them. But at the White House briefing, Vice President Dick Cheney drew his own conclusion. The "second wave" strike did not occur, he reportedly told Bush and others, because it would not have been dramatic enough to outdo the World Trade Center and Pentagon attacks. Al Qaeda, he declared, was waiting until it could mount something more devastating in its worldwide impact.

This is highly speculative, of course—though Cheney would likely disagree. But a second element is a matter of fact. That's the increasingly fragile state of the U.S. economy. With growth slowing, Wall Street has grown jittery. You see it in the outsized reactions to the Fed's interest rate decisions. Job numbers have been soft. Corporate spending has yet to recover from the pasting it took with the collapse of the Internet bubble. Lately what has overwhelmingly been the country's most powerful economic driver—rising home prices and housing construction—has been showing increasing signs of weakness. Bubbles have undergirded U.S. growth for a quarter of a century, from the boom that accompanied banking deregulation in the ‘80s through the Internet and telcom craze to today's housing euphoria. Once that goes, there's little else on the horizon.

So, imagine a perfect storm. A terrorist gas attack on New York (or some other Al Qaeda adventure) coupled with the sort of incident envisaged in the eminently reasonable oil shock scenario played out at Davos. Indeed, you have a whiff of that right now with BP—not to mention the ugliest and most dangerous situation in the Middle East in three decades. Factor in Wall Street's new nervousness, enormously susceptible to events such as these, compounded by concerns over housing deflation. If it all began coming unglued at the same time, what a mess.

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