Over a barrel

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Terrorists yesterday struck oil facilities in the US and Saudi Arabia, pushing oil prices to a record $120 a barrel and doubling to $5,214 the expected annual petrol bill for the average US household. Economists warned of the imminent collapse of the US's economic recovery and a loss of more than 2m jobs, the largest drop since 1945.

While none of this is true, the scenario is thoroughly plausible, according to high-ranking former government, military and intelligence officials who made up the US cabinet in a simulation exercise that is gaining increasing attention from members of Congress, the White House and oil executives.

"The risk of supply disruption in the oil markets now appears to be at one of the highest levels in history, primarily because of the thin cushion of spare capacity," John Dowd, analyst at Sanford Bernstein, which prepared the simulation's price reactions, ...

For the scenario, which included the evacuation of foreign workers from Saudi Arabia and unrest in Nigeria, analysts at Sanford Bernstein calculated that a 4 per cent reduction in world oil supply would increase prices by more than 170 per cent...

The mock cabinet concluded that the strategic petroleum reserve was of limited usefulness in such a crisis – it chose to tap it only when prices went to $120 a barrel. Using some of the emergency barrels too early could send prices higher, they said, because traders would worry that less emergency oil would be available if a more serious disruption ensued.

But the limited size of the stocks – the equivalent of two months of US imports – meant the reserve was useless for longer-term disruptions, such as an evacuation of all foreign personnel from Saudi Arabia, which was one of the scenarios presented in the role-play...

Oil closed at a record today.