Oil ShockWave and the Caspian

In the basement of the Ritz-Carlton hotel in Washington yesterday, a bipartisan group of senior foreign policy hands participated in a mock crisis triggered by a closure of the Baku-Ceyhan oil pipeline.

The ultimate result once all the dominoes fell: $160-a-barrel oil.

The exercise was called Oil ShockWave, and the group's main prescription for averting this outcome was a reduction of U.S. dependence on foreign oil, and demand for oil and gas overall.

But the exercise -- which included retired Gen. John Abizaid, Reagan-era Navy Secretary John Lehman, Clinton-era Treasury Secretary Robert Rubin and Bush II State Department adviser Philip Zelikow, in addition to Dan Yergin, author of The Prize -- points up another reality.

Now that the West has built the Baku-Ceyhan pipeline -- which came on line last year, and now ships about 1 million barrels of oil a day onto the Mediterranean Sea -- it and the world as a whole are vulnerable to events in the region it serves.

And it will become more so in the coming decade and beyond. Once Kazakhstan's giant Kashagan oilfield is on line, the region will be exporting more than 4.5 million barrels a day of crude oil onto the world market. That will be 1 million-plus from offshore Baku, 1 million-plus from Kazakhstan's Tengiz field, 1.5 million from Kashagan and about 1 million barrels from Kazakhstan's Karachaganak and an assortment of other, smaller fields.

That means that the suggested resolution -- reduced demand -- while part of the solution, isn't nearly sufficient.

Azeri President Ilham Aliyev, in my opinion, needs to move into crisis mode in terms of reducing pocket-lining in his administration, starting with the first family itself. As he and his father before him have been urged for years, Azerbaijan should ensure that the fruits of the country's energy bonanza reach the broad population. And he's not moving nearly fast enough to diversify the economy so that when the oil goes into decline -- right on the visible horizon, in the next decade -- Azerbaijan doesn't plunge into crisis

Kazakhstan's Nursultan Nazarbayev has a longer time line, but he also needs to reel in official corruption and spread the wealth.

In addition, the U.S. should redouble its efforts to get Turkmenistan and Kazakhstan to take the risk and commit to construction of a trans-Caspian natural gas pipeline, and a companion oil line. They would make Central Asia more stable by providing them a more balanced supply route for their energy exports.

In the simulation, described by The New York Times' John Broder, unrest in Azerbaijan triggers the pipeline shutdown. But it as well could have suggested disturbances in Georgia or Turkey, the latter which has been the scene of a current confrontation between the Turkish Army and Kurdish militants across the border in Iraq.

Such gaming isn't new. U.S. Army strategists have spun out simulated crises in Central Asia and the Caucasus for at least a decade. What's different now is that the region's importance is no longer notional -- U.S. strategic interests are installed in the form of producing oilfields and pipelines in the western-friendly nations of Azerbaijan, Georgia and Kazakhstan, connecting with Turkey.

The Caspian has become integrated into the global economy. As Oil ShockWave dramatizes, it's already a price-maker on the supply margin, where the storms of crises start out.

Greenspan and the Caspian

As part of the publicity for his memoir, just out today, Former Fed chairman Alan Greenspan has given a slew of interviews. In a chat with Bob Woodward of The Washington Post, he accents the knife's edge on which the world economy rests because of tight oil supplies, and inadvertently provides an argument for why the Caspian Sea is strategically important.

In the Post interview, according to Woodward, Greenspan said that the disruption of even 3 to 4 million barrels a day of oil could translate into crude prices as high as $120 a barrel; the loss of anything more would mean "chaos" to the global economy, Greenspan said. Read story

That is precisely the volume of oil exports expected from the Caspian -- from Kazakhstan and Azerbaijan combined -- after about a decade. The main fields involved will be Tengiz, Kashagan and Karachaganak in Kazakhstan, and offshore Baku in Azerbaijan.

As it appears now, much of this oil will pass through the East-West oil corridor championed by Washington, with its hub in Baku. It is why the U.S. has put so much diplomatic weight behind relationships with Georgia, Azerbaijan, Kazakhstan and Turkmenistan.

Oil prices are largely decided on the margin -- those last 3 to 5 million barrels of total daily world demand. In the next decade, the flow of Caspian oil will produce the equivalent of that margin.