Ensuring stability: energy security in the era of oil uncertainty

Disruption to energy systems is a fact of modern life. One, perhaps less well known, benefit of decentralized energy (DE) is the increased security of supply that it delivers, compared to a highly centralized system. With a dispersed DE system, the impact of disruption to one of its components is local, and relatively minor, writes Gal Luft.

by Gal Luft

Energy terrorism is a new threat of the post-September 11 era. What would terrorists want to achieve by targeting energy? First, they are looking for ways to wreak havoc and instill fear in the societies they target. Since energy is such a critical building block of modern societies, targeting energy would guarantee such results. Second, attacks against energy would be an effective way to weaken their enemies economically.

The economic damages of a major blackout or an oil supply disruption could be on the order of hundreds of billions of dollars. Furthermore, by denying oil to the tight global market at a time when energy prices are high, oil is in very high demand; and with energy markets suffering from lack of liquidity and redundancy, terrorists can drive oil prices up with relative ease. Not only do consumers have to pay more for crude oil, they also incur rising insurance costs and the cost of protecting energy facilities.

Altogether the oil supply damage that is currently taking place in Iraq and elsewhere has removed more than one million barrels per day from the market. Had this amount of oil been in the market, prices would have been US$15-20 a barrel lower. This means that billions of dollars have been diverted from the economies of oil-consuming countries as a result.

While the economic damage is significant, things could get much worse should terrorists damage one of the major oil facilities in the Persian Gulf. This could bring a cut in oil output far beyond anything we have seen so far with profound and long-lasting consequences for the global economy. The supply disruptions of the 1970s cost the US economy between $2.3 trillion and $2.5 trillion. According to a study by the National Defense Council Foundation, today such an event could carry a price tag as high as $8 trillion – a figure equal to about 60% of US gross domestic product. Clearly, given the instability that characterizes the world’s top oil producers, the question is not whether we will experience a supply disruption, but rather when.


The challenges to the electricity system are no less daunting than those to the oil and gas sector. A series of major blackouts in the summer of 2003 was a stark reminder of the vulnerability of national grids. In August that year, an electricity blackout affected 50 million people in the north-eastern and mid-western US and Canada. Two weeks later another outage hit London and parts of south-east England, disabling public transport at the height of the evening rush hour. The following month a power blackout hit virtually the whole population of Italy, unleashing major chaos.

None of those disruptions occurred due to malicious act of terrorists. Typically, such blackouts are caused by severe weather damage or facility equipment failures, most of which can be repaired quickly. But the implications of a serious terror attack on electricity facilities by truck bombs, chemical or biological contamination, use of airplanes, or internet attacks and hijacking of control systems could be much more serious.

In North America alone there are about 15,000 power generators in 10,000 power plants and hundreds of thousand miles of transmission lines. Just like the world’s oil system, this enormous power network is very stressed, ageing and vulnerable. While much has been done in the past five years to improve critical energy infrastructure protection, electricity systems on both sides of the Atlantic are still highly vulnerable. A major electricity blackout could bring modern life to a grinding halt and cause unprecedented chaos. Such an attack could cause collapse of computer networks, breakdown of elevators and other equipment, shutdown of financial markets, energy and water facilities as well as air and rail traffic control. The economic losses in such a case could be severe and thousands could die as a result of lack of essential services. Because of the centralized nature of our electricity grid, even a local disruption could have a significant ripple effect.


Protect existing assets
A major investment in critical energy infrastructure protection is unavoidable in all energy sectors. Throughout the world, oil, gas and power companies deploy a wide variety of technologies, including sophisticated ground and air surveillance systems as well as features such as failure diagnostic systems, automatic alarm systems, and self-healing capabilities, to reduce the success rate of saboteurs and mitigate the damage in case they succeed in carrying out their mission. In Iraq alone more than 20,000 security guards have been deployed along the pipelines, refineries, power stations and other critical installations.

When it comes to power systems, protecting all the widely diverse and dispersed assets is impractical. (There are 6600 transformers in eastern US alone). The focus should therefore be on the critical nodes such as generating plants, substations, and key transmission towers. But all of these expensive remedies add a surcharge to the price of energy we consume, which is already unusually high. Furthermore, bringing these systems to optimal utilization will require close collaboration between government at all levels and the private sector.

In all energy sectors we must ensure that if an attack does occur the damage is minimal and the recovery time is minimized. This requires sufficient stock of equipment and spare parts as well as technical recovery teams that can be rapidly mobilized and ready for action.

Users’ union
To dampen the impact of oil terrorism, energy systems should have more redundancies and spare capacities. In the case of oil, major consuming countries can create liquidity mechanisms by stocking strategic petroleum reserves. OECD countries already have close to four billion barrels of oil reserves. The US alone has an emergency reserve of 770 million barrels. While this may be enough to mitigate supply disruption to OECD countries, it is not sufficient to protect the economies of Asian and developing nations if there is a severe disruption of oil supplies. However, were the strategic reserves expanded to include Asian countries such as China and India, this could serve as an effective liquidity mechanism and a signal to the terrorists that the oil weapon can no longer be used against oil-consuming countries.


In the electricity sector sufficient redundancy can be created by building new power transmission systems. But a much better approach to mitigate the risk is distributed generation.

A variety of small, modular power-generating technologies combined with energy storage and power management systems can reduce reliance on the vulnerable centralized electricity distribution grid. Smaller power generation plants, including diesel, biomass, biogas, solar and wind can be located closer to the homes and businesses where the power is meant to be used. If a small power generation plant goes off-line for any reason, there are hardly any cascading effects beyond the local area of service. It is also much easier and cheaper to reconstitute than a large centralized one.

Distributed generation is also an essential component of overall efforts to protect the critical infrastructure of modern societies, allowing critical nodes in the economy like hospitals, water and sewer systems, transportation hubs, commerce and finance systems to continue to function when the central power system falters. The more that these critical power consumers can operate independently of the grid using microturbines, solar panels, fuel cells and other technologies, the easier it will be to provide essential services in case of emergency.

Distributed generation is therefore a component of every nation’s national security strategy. It is not only a good way to reduce the impact of a terror attack by not keeping all the eggs in one basket, but it also provides an opportunity to integrate renewable energy technologies into a redundant, separately administered power system. This approach also has side benefits such as reduced transmission and lower distribution costs.

Finally, as national security becomes increasingly important in various countries, threats have created a new rationale for conservation and shift to renewable sources. The logic is simple: the less dependent countries become on energy coming from other countries, the less vulnerable they become to supply disruptions, embargos and intimidation. The US power sector, for example, has largely diversified away from oil, and today only 2% of generation is petroleum-based. However, increased use of domestic resources can curb reliance on growing imports of natural gas.

Major savings can be achieved in the electricity sector through new building designs, improved insulation, distributed generation and combined heat and power technologies. All of these save energy, offer reliable, high-quality power, reduce emissions and contribute to an infrastructure ready for the clean fuels of tomorrow. By shifting from a centralized to a more decentralized model we can insulate the economy against supply disruptions while retaining more wealth at home. Last time we paid attention – after the oil crises of the 1970s – US oil consumption fell 15% and its oil imports fell by 42%. This can be done again.

Uninterrupted supplies of cheap energy, whether for transportation or electricity, will be key to the functioning of the world economy in the 21st century. Yet there are many who are bound to create chaos by undercutting supplies. If the world stays on its present course, vulnerabilities will eventually be exploited and the outcome could be catastrophic. It is time to take a hard look at our vulnerabilities and develop a balanced basket of policy and technology solutions (including DE) that, applied together, could provide a far safer energy future.

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Gal Luft is Executive Director of the Institute for the Analysis of Global Security, Washington, US.
e-mail: luft@iags.org

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