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Don't Touch The Petroleum Reserves!

As some politicians call for the Strategic Petroleum Reserve to be tapped to ease gasoline prices, The Economist weighs in with a special report on Saudi Arabia and oil.

The current light sweet crude spot price of $40+ per barrel is not due to a shortage of supply. While the booming world economy has caused supply to tighten, there is an $8 to $10 "terror premium" built in because of market worries about the Saudi oil infrastructure being the target of al Qaeda terrorists. And since the Saudi production reserves are what buffers the world oil market, a disruption of Saudi oil would be immediately felt around the world.

John Kerry is wrong, we shouldn't dip into our strategic reserves to ease $2 a gallon gasoline. We need the reserves in case this happens:

James Woolsey, a former head of America's Central Intelligence Agency, is unimpressed by talk of improved security (of Saudi oil infrastructure): "Guards and fences are easy to put up, but they don't defend against the real threats." Trucks have to come in and out of facilities, he observes, and Aramco employees and security guards have to move about. He thinks that several attacks, if co-ordinated by terrorists who have infiltrated Aramco, could cripple the Saudi system.

How, exactly? Robert Baer, an intelligence expert, offers some suggestions in his disturbing recent book, "Sleeping with the Devil". He reckons that Ras Tanura, a port on the Gulf, is a vulnerable terrorist target. With an output of perhaps 4.5m bpd, this is the biggest oil-exporting port in the world. Mr Baer thinks a small submarine or a boat laden with explosives (as happened in October 2000 with the attack on the USS Cole off the coast of Yemen) could knock out much of Ras Tanura's output for weeks, or even longer.

An even scarier possibility raised by Mr Baer is the crashing of a hijacked aeroplane into Abqaiq, the world's largest oil-processing complex. If done with the help of insiders, he speculates that the facility's throughput (nearly 7m bpd, on his estimate) would be choked off to as little as 1m bpd for two months—and might remain as low as 3m bpd for seven months.

Mr Woolsey adds that an attack using weapons of mass destruction (especially "dirty bombs") would be even more devastating than one that used mere aeroplanes. All told, the pessimists reckon that well-co-ordinated attacks could take as much as 6m-7m bpd of Saudi output off the market for weeks, and perhaps longer.

Gasoline might currently seem expensive, but the loss of Saudi oil for several months would drive up the price of practically everything. The strategic reserves should be saved for that crisis.