Extreme heat is the deadliest weather phenomenon in the United States — more lethal than hurricanes, floods, and tornadoes combined. And, as extreme temperatures rise, so do American household energy bills. An alarming 16% (20.9 million) of U.S. households are behind on their energy bills and at an increased risk of utility shut-offs. 

Many households rely on electrical power systems like air conditioning (AC) to combat immediate heat effects, increasing energy demand and straining power transmission capabilities, non-reliability, and energy insecurity. Even as increasingly warmer winter months due to climate change reduce the need for heating, this indicates a future with increased energy demand for cooling. In the U.S., projected changes in cooling degree days — the metric to estimate how much cooling is needed to maintain a comfortable indoor air temperature — are expected to drive a 71% increase in household cooling demand by 2050, according to the latest annual energy outlook from the U.S. Energy Information Administration (EIA).

Increasingly excessive heat is, therefore, a financial burden for many people, particularly low-income households. This is especially the case as low-income households tend to live in less energy-efficient homes that are more expensive to cool. The inability to afford household energy needs — that is, energy insecurity — makes it a challenge to stay cool, comfortable, and healthy during periods of extreme heat. Thus, as the impacts of extreme heat and energy insecurity are not distributed evenly, it is increasingly essential for the federal government to consider equity and prioritize disadvantaged populations in its efforts to tackle these intertwined crises.

Extreme Heat Drives Energy Burdens and Utility Insecurities

Energy insecurity refers to an individual or household’s inability to adequately meet basic household energy needs, like cooling and heating. Extreme heat compounds existing energy insecurities by surging the need for AC and other electrical sources of cooling technology. Thus, as the demand for cooling during summer increases energy consumption, many households cannot afford to run their AC, leading to life-threatening living conditions. According to the latest EIA Residential Energy Consumption Survey (RECS), a striking one in five households reported reducing or forgoing necessities like food and medicine to pay an energy bill. Over 10% of households reported keeping their home at an unhealthy or unsafe temperature due to costs.

Additionally, while household access to AC has increased over the years, a significant one in eight U.S. homes on average are still lacking AC, with renters going without at a higher rate than homeowners. The lack of access to cooling may be particularly hazardous for low-income, renter, rural, or elderly households, especially for those with underlying health conditions and those living in heat islands—urban areas where temperatures are higher than surrounding rural and suburban areas.

Another critical issue is that at least three million U.S. utility customers have their power disconnected every year due to payment challenges, yet 31 states have no policy preventing energy shut-offs during excessive heat events. The states that do have policies vary widely in their cut-off points and protection policies. Across the board, low-income people are disproportionately facing disconnections and are often charged a “reconnect fee” or a deposit after a cutoff. 

As of 2021, 29 states had seasonal protections and 23 had temperature-based disconnection protections that prohibit utility companies from disconnecting power. Still, research from the Indiana University Energy Justice Lab shows that these do not fully prohibit disconnections, often putting the onus on customers to demonstrate eligibility for an exemption, such as medical need. Further, while 46 states, along with Washington D.C., give customers the option to set up a payment plan as an alternative to disconnection, high interest rates may be costly, and income-based repayment is rarely an option.

These cut-off policies are all set at the state level, and there is still an ongoing need to identify best practices that save lives. Policymakers can use utility regulations to protect residents from the financial burden of extreme heat events. For example, Phoenix passed a policy that went into effect in 2022 and prevents both residential energy disconnections in summer months (through October 2024) and late fees incurred during this time for residents who owe less than $300. Also, some stakeholders in Massachusetts are considering “networked geothermal energy with microdistricts” — also known as geogrids — to build the physical capability to transfer cool air through a geothermal network. This could allow different energy users to trade hot and cool air,  in order to move cool air from members who can pay for it to those who cannot.

Grid Insecurity

Extreme heat also poses a significant threat to national energy grid infrastructure by increasing the risk of power outages due to increased energy consumption. Nationwide, major power outages have increased tenfold since 1980, largely because of damages from extreme weather and aging grid infrastructure. Regions not accustomed to experiencing extreme heat and lacking the infrastructure to deal with it will now become particularly vulnerable. Disadvantaged neighborhoods in urban heat islands also face heightened risks as they more frequently lack the essential infrastructure needed to adapt to the changing climate. For example, grid infrastructure in California’s urban disadvantaged communities has been shown to be weaker and less ready to support electric appliances. 

Similarly, rural communities face unique challenges in preparing for disasters that could lead to power loss. Geographic isolation, limited resources, and older infrastructure are all factors that make power outages more frequent and long-lasting in rural areas. These factors also affect the frequency of maintenance service and speed of repairs. In addition, rural areas often have less access to emergency services and cooling centers, making power outages during extreme heat events additionally hazardous. Power outages during extreme heat events increase the risks for heat-related illnesses such as fainting, heat exhaustion, and heatstroke. And, for rural homes that rely on well water, losing power can mean losing access to water, since well systems rely on electrical pumps to bring water into the home. 

Further heightening the need for urgency to consider these especially vulnerable populations and regions, research has shown that the time to restore power after an outage is significantly longer for rural communities and in low-income communities of color. Power restoration time reflects which communities are prioritized and, as a result, which communities are neglected. 

Equity Considerations For Different Housing Types

Extreme heat and energy security cannot be addressed without considering equity, as the impacts are not distributed evenly, especially by race, income, and housing type. One example of this intersection: Black renters have faced disproportionate burdens of extreme heat and energy security, as wealth is deeply correlated with race and homeownership in the U.S. In 2021, the EPA reported that Black people are 40% more likely than non-Black people to live in areas with the highest projected increase in mortality rates due to extreme temperatures. Simultaneously, a 2020 analysis by the Brookings Institute found that Black renters had greater energy insecurity than white renters, Black homeowners, and white homeowners. Beyond the cost burden of staying cool, this energy security puts lives at greater risk of heat-related illness and death and hinders economic mobility.

This paradigm reflects historic, discriminatory housing policies like redlining. Such policies segregated neighborhoods, induced lower homeownership rates, and ensured underinvestment in low-income communities of color—all of these factors play a significant part in making Black residents more vulnerable to the effects of extreme heat. Further compounding this, a 2020 study of more than 100 cities across the U.S. found that 94% of formerly redlined areas are hotter than non-redlined areas; in the summer, this difference can be as high as 12.6℉. 

Nationwide, households living in manufactured homes also face disproportionate risks and impacts, with about 25% having incomes at or below the federal poverty level. At the same time, manufactured homes consume 70% more per square foot on energy than site-built homes, while using 35% less energy due to their smaller size. Notably, about 70% of all manufactured homes are located in rural areas, which on average have higher median energy burdens than metropolitan areas. 

Further, ​​older manufactured housing units are often in inadequate condition and do not meet building codes established after 1976. However, research has shown that the vulnerability of households living in manufactured housing units to extreme temperatures is only partially related to whether they have AC systems installed. Other key factors that residents report to drive vulnerability include AC units that do not work efficiently, are located in less-used parts of the house, or are ineffective in maintaining comfortable temperatures. These factors hamper manufactured housing residents’ ability to control their home’s thermal environment — thereby driving thermal insecurity.

Manufactured housing households facing challenges with resource access (such as exclusions from assistance programs and lack of credit access), physical health and mental limitations, care burdens, and documentation status may be at disproportionate risk. These households deal with multiple, intersecting vulnerabilities and often must engage in trade-off behavior to meet their most immediate needs, sacrificing their ability to address unsafe temperatures at home. They often take adapting to the increasingly extreme climate into their own hands, using various ways to cope with thermal insecurity, such as installing dual-pane windows, adding insulation, planting shade trees, using supplemental mobile AC units, and even leaving home to visit local air-conditioned malls.

These overlapping paradigms showcase the intrinsic interconnectedness among climate justice, climate justice, energy justice, and housing justice. Essentially, housing equity cannot be pursued without energy justice and climate justice, as the conditions for realizing each of these concepts entail the conditions for the others.  Realizing these conditions will require substantial investment and funding for climate programs to include heat governance, housing resilience, and poverty alleviation policies. 

Policy Considerations

Energy Burdens and Utility Insecurity

Update the Low Income Home Energy Assistance Program (LIHEAP)

The Low Income Home Energy Assistance Program (LIHEAP) exists to relieve energy burdens, yet was designed primarily for heating assistance. Thus, the LIHEAP formulas advantage states with historically cooler climates. To put this in perspective, some states with the highest heat risk — such as Missouri, Nevada, North Carolina, and Utah —  offer no cooling assistance funds from LIHEAP.  Despite their warm climates, Arizona, Arkansas, Florida, and Hawai’i all limit LIHEAP cooling assistance per household to less than half the available heating assistance benefit. And, since most states use their LIHEAP budgets for heating first, very little remains for cooling assistance — in some cases, cooling assistance is not offered at all. As a result, from 2001 to 2019, only 5% of national energy assistance went to cooling. 

For vulnerable households, the lack of cooling assistance is compounded by a lack of disconnection protections from extreme heat. Thus, with advanced forecasts, LIHEAP should also be deployed both to restore disconnected electric service and to make payments on energy bills, which may surge even higher with the increase in demand response pricing due to more extreme temperatures. The distribution of LIHEAP funds to the most vulnerable households should also be maximized. As most states do not have firm guidelines on which households to distribute LIHEAP funds to and use a modified “first-come, first-served” approach, a small number of questions specific to heat risk could be added to LIHEAP applications and used to generate a household heat vulnerability score.

Further, the LIHEAP program is massively oversubscribed, and can only service a portion of in-need families. To adapt to a hotter nation and world at large, the annual budgets for LIHEAP must increase and the allocation formulas will need to be made more “cooling”-aware and equitable for hot-weather states. The FY25 presidential budget keeps LIHEAP’s funding levels at $4.1 billion, while also proposing expanding eligible activities that will draw on available resources. Analysis from the National Energy Assistance Directors Association found that this funding level could cut off up to 1.5 million families from the program and remove program benefits like cooling. 

Reform the Public Utility Regulatory Policies Act of 1978 (PURPA) 

While PURPA prohibits electric utilities from shutting off home electricity for overdue bills when doing so would be dangerous for someone’s health, it does not have explicit protections for extreme temperatures. The federal government could consider reforms to PURPA that require utilities to have moratoriums on energy shut-offs during extreme heat seasons.

Housing Improvements

Expand Weatherization Assistance Programs

Weatherization aims to make homes more energy efficient and comfortable in various climates through actions, such as attic and wall insulation, air sealing, or adding weather stripping to doors and windows. More than half of cities have a weatherization program. The Department of Energy (DOE) Weatherization Assistance Program (WAP) funding is available for states and other entities to retrofit older homes for improved energy efficiency to power cooling technologies like AC. However, similar to LIHEAP, WAP primarily focuses on support for heating-related repairs rather than cooling. For all residential property types, weatherization audits, through WAP and LIHEAP, can be expanded to consider heat resilience and cooling efficiency of the property and then identify upgrades such as more efficient AC, building envelope improvements, cool roofs, cool walls, shade, and other infrastructure. 

Further, weatherization can be complicated when trying to help the most vulnerable populations. As some of the houses are in such poor condition that they do not qualify for weatherization, there is a need for nationwide access to pre-weatherization assistance programs. These programs address severe conditions in a home that would cause a home to be deferred from the federal WAP because the conditions would make the weatherization measures unsafe or ineffective. Pre-weatherization assistance programs are typically run by the State WAP Office or administered in partnership with another state office.  

Additionally, as the Infrastructure Investment and Jobs Act (IJA) allocated roughly $3.5 billion to WAP, states should utilize this funding to target energy-insecure neighborhoods with high rates of rental properties. Doing so will help states prioritize decreasing energy insecurity and its associated safety risks for some of the most vulnerable households.

Increase Research on Federal Protections for Vulnerable Housing Types

There is a need for a nationwide policy for secure access to cooling. While the Department of Housing and Urban Development (HUD) does not regulate manufactured home parks, it does finance the parks through Section 207 mortgages. HUD  could stipulate park owners must guarantee resident safety. This agency could also update the Manufactured Home Construction and Safety Standards to allow for AC and other cooling regulations in local building codes to apply to manufactured homes, as they do for other forms of housing, as well as require homes perform to a certain level of cooling under high heat conditions. Additionally, to support lower-cost retrofit methods for manufactured homes and other vulnerable housing types, new approaches to financing, permitting, and incentivizing building retrofits should be developed, per the Biden-Harris Administration’s Climate Resilience Game Changers Assessment.  HUD’s Green and Resilient Retrofit Program, which provides climate resilience funding to affordable housing properties, can serve as a model.

Further, as home heat-risk remains under-studied and under-addressed by hazard mitigation planning, and policy processes, there needs to be better measures of home thermal security. Without better data, homes will continue to be overlooked in state and federal climate and adaptation efforts. 

Grid Resilience and Energy Access

Prioritize access to affordable, resilient energy alternatives for energy-insecure individuals

The most long-term investment in reducing energy insecurity and climate vulnerability is ensuring the most energy insecure populations have access to alternative, renewable energy sources, such as wind and solar.  This is a core focus of the DOE Energy Futures Grant (EFG) program, which provides $27 million in financial assistance and technical assistance to local- and state-led partnership efforts for increasing access to affordable clean energy. EFG is a Justice 40 program, and required to ensure 40% of the overall benefits of its federal investments flow to disadvantaged communities. Programs like EFG can serve as a model for federal efforts to reduce energy cost burdens, while simultaneously reducing dependence on nonrenewable energy sources like oil and natural gas. 

Accelerate Energy-Efficient Infrastructure

Efficient AC technologies, such as air source heat pumps, can help make cooling more affordable. Therefore, resilient cooling strategies, like high-energy efficiency cooling systems, demand/response systems, and passive cooling interventions, need federal policy actions to rapidly scale for a warming world. For example, cool roofs, walls, and surfaces can keep buildings cool and less reliant on mechanical cooling, but are often not considered a part of weatherization audits and upgrades. District cooling, such as through networked geothermal, can keep entire neighborhoods cool while relying on little electricity. However, this is still in the demonstration project phase in the U.S. Initiatives like the DOE Affordable Home Energy Shot can bring new resilient cooling technologies into reach for millions of Americans, but only if it is given sufficient financial resources. The Environmental Protection Agency’s Energy Star program can further incentivize low-power and resilient cooling technologies if rebates are designed that take advantage of these technologies.

Geothermal energy is having a moment. The Department of Energy has made it a cornerstone of their post-BIL/IRA work – announcing an Enhanced Geothermal Earthshot last year and funding for a new consortium this year, along with additional funding for the Frontier Observatory for Research in Geothermal Energy (FORGE), Utah’s field lab. 

It’s not just government – companies hit major milestones in commercial applications of geothermal this year. Fervo Energy launched a first-of-its-kind next-generation geothermal plant, using technology it developed this year. Project Innerspace, a geothermal development organization, recently announced a partnership with Google to begin large-scale mapping and subsurface data collection, a project that would increase understanding of and access to geothermal resources. Geothermal Rising recently hosted their annual conference, which saw record numbers of attendees. 

But despite the excitement in these circles, the uptake of geothermal energy broadly is still relatively low, with only 0.4% of electricity generated in the U.S. coming from geothermal.

There are multiple reasons for this – that despite its appeal as a clean, firm, baseload energy source, geothermal has not exploded like its supporters believe it can and should. It has high upfront costs, is somewhat location dependent, and with the exception of former oil and gas professionals, lacks a dedicated workforce. But there are a range of actors in the public and private sector who are already trying to overcome these barriers and take geothermal to the next level with new and creative ideas.

One such idea is to use DOE’s newly authorized Foundation for Energy Security and Innovation (FESI) to convene philanthropy, industry, and government on these issues. At a recent FAS-hosted workshop, three major, viable use cases for how FESI can drive expansion of geothermal energy rose to the surface as the result of this cross-sector discussion. The foundation could potentially oversee: the development of an open-source database for data related to geothermal development; agreements for cost sharing geothermal pilot wells; or permitting support in the form of technical resource teams staffed with geothermal experts. 

Unlocking Geothermal Energy

DOE’s Foundation for Energy Security and Innovation (FESI) was authorized by the CHIPS and Science Act and is still in the process of being stood up. But once in action, FESI could provide an opportunity for collaboration between philanthropy, industry, and government that could accelerate geothermal. 

As part of our efforts to support DOE in standing up its new foundation with the Friends of FESI initiative, FAS is identifying potential use cases for FESI – structured projects that the foundation could take on as it begins work. The projects must forward DOE’s mission in some way, with particular focus on clean energy technology commercialization. We have already received a wide range of ideas for how FESI can act as a central hub for collaboration on specific clean energy technologies; how it can support innovative procurement and talent models for government; or how it can help ensure an equitable clean energy transition. 

In early October, FAS had the opportunity to host a workshop as part of the 2023 Geothermal Rising Conference. The workshop invited conference attendees from nonprofits, companies, and government agencies of all levels to come together to brainstorm potential projects that could forward geothermal development. The workshop centered on four major ideas, and then invited attendees to break out into small groups, rotating after a period of time to ensure attendees could discuss each idea. 

The workshop was successful, adding depth to existing ideas. The three main ideas that came out of the workshop – an open source geothermal database, cost sharing pilot wells, and permitting support – are explored in more detail below. 

Open-source database for subsurface characterization

One of the major barriers to expanded geothermal development is a lack of data for use in exploration. Given the high upfront costs of geothermal wells, developers need to have a detailed understanding of subsurface conditions of a particular area to assess the area’s suitability for development and reduce their risk of investing in a dead end. Useful data can include bottom hole temperatures, thermal gradient, rock type, and porosity, but can also include less obvious data – information on existing water wells or transmission capacity in a particular area. 

These data exist, but with caveats: they might be proprietary and available for a high cost, or they might be available at the state level and constrained by the available technical capacity in those offices. Data management standards and availability also vary by state. The Geothermal Data Repository and the US Geological Survey manage databases as well, but utility of and access to these data sources is limited. 

With backing from industry and philanthropic sources, and in collaboration with DOE, FESI could support collection, standardization, and management of these data sources. A great place to begin would be making accessible existing public datasets. Having access to this data would lower the barrier to entry for geothermal start-ups, expand the types of geothermal development that exist, and remove some of the pressure that state and federal agencies feel around data management. 

Cost sharing pilot wells

After exploration, the next stage in a geothermal energy source’s life is development of a well. This is a difficult stage to reach for companies: there’s high risk, high investment cost, and a lack of early equity financing. In short, it’s tough for companies to scale up, even if they have the expertise and technology. This is also true across different types of geothermal – just as much in traditional hydrothermal as in superhot or enhanced geothermal. 

One way FESI could decrease the upfront costs of pilot wells is by fostering and supporting cost-share agreements between DOE, companies, and philanthropy. There is a precedent for this at DOE – from loan programs in the 1970s to the Geothermal Resource Exploration and Definition (GRED) programs in the 2000s. Cost-share agreements are good candidates for any type of flexible financial mechanism, like the Other Transactions Authority, but FESI could provide a neutral arena for funding and operation of such an agreement. 

Cost share agreements could take different forms: FESI could oversee insurance schemes for drillers, offtake agreements, or centers of excellence for training workforces. The foundation would allow government and companies to pool resources in order to share the risk of increasing the number of active geothermal projects. 

Interagency talent support for permitting

Another barrier to geothermal development (as well as to other clean energy technologies) is the slow process of permitting, filled with pitfalls. While legislative permitting reform is desperately needed, there are barriers that can be addressed in other ways. One of these is by infusing new talent: clean energy permitting applications require staff to assess and adjudicate them. Those staff need encyclopedic knowledge of various state, local, tribal, and federal permitting laws and an understanding of the clean energy technology in question. The federal government doesn’t have enough people to process applications at the speed the clean energy transition needs. 

FESI could offer a solution. With philanthropic and private support, the foundation could enable fellowships or training programs to support increased geothermal (or other technological) expertise in government. This could take the form of ‘technical resource teams,’ or experts who can be deployed to agencies handling geothermal project permitting applications and use their subject matter knowledge to move applications more quickly through the pipeline. 

The Bottom Line

These ideas represent a sample in just one technology area of what’s possible for FESI. In the weeks to come, the Friends of FESI team will work to develop these ideas further and also start to gauge interest from philanthropies in supporting them in the future. If you’re interested in contributing to or potentially funding these ideas, please reach out to our team at fesifriends@fas.org. If you have other ideas for what FESI could work on or just want to keep up with FESI, sign up for our email newsletter here.

Whether an oil and gas company is working in the United States or is spread throughout the world, it will face geopolitical and cyber risks which could affect global energy security.

Geopolitical Risk

There are numerous geopolitical risks for any oil and gas company. Even if a company just works in the United States, it needs to know what is happening in countries all over the world, especially those countries that are large oil and gas producers. Because oil markets are so tightly connected globally, major political events in oil exporting states could seriously affect the price and even availability of oil. An attack on an oil platform in Nigeria, a terrorist event in Iraq, the closing down of port facilities in Libya and many other examples come to mind. Consider the potential effects of a major attack on the Ab Qaiq facility in Saudi Arabia. If this facility is damaged or destroyed on a large scale by rockets or bombs, the world oil market could be out 6-7 million barrels of oil a day- out of the 90-92 millions of barrels a day the world needs. World spare oil production capacity is about 2.3 million barrels a day. It could take some time to get this online. The spare production can be ramped up, but not immediately. Given that the grand majority of excess capacity in the world is located in Saudi Arabia and that this excess capacity could be significantly cut back with damage to Ab Qaiq, the situation is even riskier.

Another major risk nearby is transits through the Straits of Hormuz. About 16-17 million barrels a day goes out of the Straits. Any attempts to close the Straits (even unsuccessful ones) could have significant effects on the prices of various grades of oil. Even with the seemingly warming in relations between the U.S. and Iran, it is still possible that things could take a turn for the worse in the Gulf region. If the present negotiations with Iran break down, tensions could rise to even higher levels than before negotiations began. This could bring discussions of the military option more public. If there is a major conflict involving Gulf countries, the United States and its allies, then all bets are off on where oil prices may go. There could be many scenarios: from oil prices increasing $100 over the pre-conflict base price to well over $200 over the pre-conflict base price.

In many other parts of the world, geopolitical risks going “kinetic” can affect oil markets. Syria is a potential whirlpool of trouble for the entire Middle East. Egypt and Libya are far from stable. Algeria could be heading into some rough times. The Sudan’s will remain problematic and potentially quite violent for some time to come. The East China Sea and South China Sea disputes are not resolved. The Central Sahara could be a source and locale for troubles for some time to come.

Terrorist events can happen anywhere. Google Earth allows terrorists and others to get very close looks at major oil and gas facilities, transport choke points and more. Also, there are not that many tankers plying the vast seas and oceans of the world. Some of the most important routes are between the Gulf region and East Asia and Europe. Others travel from West Africa to Europe, and less so to the United States than before its shale oil revolution. The Mediterranean has many important tanker shipping routes. The Red Sea is a crucial route for both ships going north and south. Over 50 percent of oil trade happens on maritime routes. Many of these tankers cross through vital chokepoints like the Strait of Malacca, the Strait of Hormuz, The Bab al Mandab, The Suez Canal, The Turkish Straits, The Danish Straits, The Panama Canal, and various harbor and river routes where risks may be higher r at sea. Even whilst at sea, ships are at risk as shown by pirate attacks and hijackings off of East Africa, West Africa and previously off of Indonesia. There are about 1,996 crude oil tankers. However, only 623 of these are of the Ultra Large Crude Carrier (ULCC) or Very Large Crude Carrier (VLCC) variety that are the most important for transporting crude oil economically over long distances from the Gulf region to places like China (the biggest importer of oil), the United States, Japan, South Korea, and Europe. VLCCs can carry about 2 million barrels of oil while ULCCs can carry up to 2.3 or, rarely, 2.5 million barrels of oil. Normally these massive ships carry crude oil, but sometimes carry many different types of crude oil. Smaller petroleum tankers may carry both crude and refined products depending on their trade routes and the state of the markets at any times. There are about 493 Suez Max tankers, which can hold about 1 million barrels of oil and refined products and about 408 Afrimax vessels, which hold about 500,000 to 800,000 barrels of crude or refined products. Additionally, there are 417 Panamax vessels, which can carry 300,000 to 500,000 barrels of oil or refined products.

This may seem like a lot of ships to some. However, especially in tight markets, the pressure is immense to keep these ships at sea and to keep them on time. Moreover, there are lots of logistical complexities in trying to keep the crude moving at the right times and to the right places. If anything disturbs this complex economic and logistical ballet of behemoths, then the economic effects could be considerable. If the oil does not arrive on time then refinery production and deliveries of refined products to markets could be disturbed. Most countries have crude and product reserves to handle short term disruptions that may result from tanker losses. If the tanker losses are large or other disruptions occur in the supply chains of crude via ships, then those reserves could be worn down. It takes well over a year to build one of these tankers.

If the market for tankers is soft and some available tankers are moored in port, (such as when close to 500 hundred ships and dozens of tankers were moored off Singapore a few years ago), then the chances are better of getting the shipping logistics back to normal faster. However, problems could still arise in getting ships needed in Houston or Ras Tanura from Singapore. The travel times of these massive ships add considerable costs and disruptions.

When disruptions occur, some crude cargos can change direction and can be sold and resold, depending on the sorts of contracts that are in effect, along the way. Sometimes the disruptions are from political events, such as revolutions, insurrections, civil instability, and natural events like hurricanes and tsunamis. For example, when the tsunami hit Japan on March 11, 2011, many cargos were delayed or reconfigured. However, these sorts of events are different from terrorists blowing up a series of ships, as the psychology is different.

There is a certain amount of flexibility built into crude tanker transport markets, but a larger question is what would happen if many of them were taken out in various parts of the world. Would such a “black swan event” cause great disruptions? This is most likely. The follow on question would be how the tanker and other connected markets would react to this to help resolve the logistical attacks and how this might affect tanker insurance and lease rates.

Given that the crude and other products feed into other supply chains and markets, there could be cascades of disruptions in many parts of the world from a significant attack on even one large VLCC. Attacks on more ships would become increasingly more complex and costly in their effects.

If even one ship is sunk with a missile, the effects on oil markets and the world economy could far outweigh the mere few hundred millions of dollars in value the tanker and its cargo may represent. Ports, pipelines, refineries, tankers and other parts of the oil, transport and other infrastructures could be affected.

The destruction of an oil facility in a sensitive area that may be worth a few billion dollars could have a negative economic impact globally in the hundreds of billions, if not more. Attacks on the Houston Ship Channel, the Louisiana Offshore Oil Port, Ras Tanura in Saudi Arabia, the Jubail Complex in Saudi Arabia, Kharg or Lavan Island in Saudi Arabia could have considerable impacts economically and even militarily.

The impacts of attacks on these facilities would be stronger when oil and tanker markets are tight, and when the world or salient regional economies are growing quickly. An attack on a major tanker route out of Saudi Arabia heading to China or Japan will have a lot less effect on tanker and oil markets when there are excess tankers at anchor, and when there is excess capacity in oil production to make up in a relatively short time than when both tanker and oil markets are tight and there is little excess capacity. The less elastic the markets, the more effect any attacks will have. If a terrorist group wanted to have the most impact on the world economy it would likely attack in times of high growth in various important economies and when there is little excess oil capacity and no spare tankers. Often these three markets are tied together. When the global economy is growing quickly oil markets are under stress. When oil markets are under stress then tanker markets are stressed.

Looking to the future, some countries could be facing political turmoil such as Russia, Saudi Arabia, Iran, and Venezuela. This turmoil is not deterministic, but it is also not completely out of the bounds of probability. Depending on the type of turmoil, damage, and loss of production and export capacity, these events could have significant effects on world oil markets.

If such turmoil is going to happen, it is better for the world oil markets and the world economy that these happen during times of greater excess production and export capacity than the losses in oil production and export capacity from the turmoil. The worst of all possible combinations would be the loss of production and export capacity during very tight market times in a country where most of the excess capacity is found, which is in Saudi Arabia. If the world economy is growing quickly all around, then the effects of such turmoil will be far greater than if the world economy is in a slow growth period.

There are also regional aspects; during the 2011 Libyan Revolution, Europe’s economy was starting to dig itself out of a deep recession that had affected most European countries. Most of Libya’s oil that was cut off for a while was supposed to go to European countries, especially Italy, Spain, and France. Libyan oil production was about 1.7 million barrels a day until the civil war/ revolution began in February 2011. About 1.5 million barrels a day was exported. After the beginning of the conflict, production dropped to about 200,000 barrels a day, and did not recover until the post-civil war “recovery” that began about 8 months later. In the period between the start of the civil war/ revolution and the start of the ramp up, oil production dropped to 100,000 barrels a day and then on down to about zero barrels a day. Very little was exported during the times of the conflict. The fact that many European economies were growing slowly, or in some cases not growing at all, helped alleviate the potential effects of the cutting off of oil shipped from Libya. About 85 percent of Libya’s oil exports before the conflict went to Europe. The countries that relied considerably on Libyan were Italy, Austria, Ireland, Switzerland, Spain, Austria, and France. However, most of these were in slow-growth phases due to the ongoing recession and growing financial crises in their countries. The tanker markets were also soft and there was significant excess capacity of oil production in Saudi Arabia. The Saudis tried to backfill some orders for Libyan crude, but some of these did not work out well due to the heavier, sourer nature of the available Saudi crude compared to the usually light, sweet crude out of Libya. Switzerland is different from the other European countries as its “consumption” of Libyan oil was mostly for trading the oil in hedge funds and the big commodity firms in Geneva. The rest of these countries needed it for their overall economic needs.

Libyan crude production increased to about 1.4-1.5 million barrels a day until further problems occurred in mid-2013 with strikes at the ports and some energy facilities. Production is now down to 200,000 barrels per day. The effects on prices has been a lot less this time than during the civil war due to new, more flexible trading arrangements and better planning for such contingencies out of Libya, but also because the European economy and tanker markets remain weak.

Many Americans may think that they are relatively immune from geopolitical turmoil in oil disruptions because of the shale oil and gas revolution in the United States and Canada. However, there is potential for the increase in trade of oil with Canada which will result in greater access to oil and gas.  But, this will not buffer the United States from the vagaries of oil prices caused by geopolitical events. This is mainly due to oil being a globally traded commodity.

Unlike the oil industry, the natural gas industry is not fully globally integrated, but it looks to be heading that way. As more countries invest in both conventional and unconventional reserves production, the development of LNG (Liquefied Natural Gas) export and import facilities, and expansions of major international pipeline networks, the world natural gas market will have some great changes. Some of these may include the convergence of prices of natural gas globally. Recent prices of natural gas (FOB – Freight on Board, where the buyer pays for transport costs) in China were about $15 per MMBTU (Million British Thermal Units), a common measurement of natural gas amounts. In Japan they were in the $16-17 ranger per MMTBTU. In many parts of Western Europe LNG (FOB) prices were about $9-11 per MMBTU. Natural gas in the United States recently has sold for about $3 per MMBTU. Qatar could sell at cost for much lower, as it sells to the United States for about $3 MMBTU similar LNG that it sells to China and Japan for much higher prices. With the convergence of prices, the lower cost countries will likely be the survivors. Others may have to drop out if they have to export the LNG at a loss, unless the country subsidizes these exports, which would be problematic under the World Trade Organization (WTO) agreements.

Those countries that develop their LNG export facilities the fastest will capture more of the most important markets (such as Japan, South Korea, and especially the potentially gigantic market in China), than those countries that doddle along in their decisions to export or not. The future of global gas markets is more of a very competitive and very expensive 4D chess game played by very powerful people, rather than just some engineering or economics exercise as some look at it.

As the now regional and segmented natural gas markets develop into global integrated markets, they  will become more efficient and regional prices will start to converge toward a global price, much like oil. As the global natural gas markets develop, there will be more spot markets developed and less need for long term contracts in many instances. For decades, oil and gas prices were linked. As a global natural gas market develops, and especially with the further spread of the shale gas revolution, fewer and fewer natural gas contracts will be linked to oil prices. However, this integration of the natural gas industry globally also brings the risk of terrorist or political driven turmoil at or near LNG ports, LNG ships, and even in the market trading centers in places far removed from the United States. The more globally integrated the natural gas markets are, the more likely reverberations to prices will occur globally, rather than just locally. It is sort of like dropping a large rock in a pond with many barriers compared to dropping a large rock in a pond without many barriers in it. The waves will have more extensive effects without the barriers.

At the moment, the United States has a special domestic market that is fairly immune from outside events, as one would expect that they would happen in Canada, the United States’ major natural gas trading partner. This will change over time as U.S. natural gas markets get more connected with the world. The United States have some buffers during difficult gas shocks globally due to massive shale gas reserves. However, it could take a long time for these reserves to surge into the domestic markets to make up for the price increases.

Large profits can be made in exporting natural gas to places like China, Japan, South Korea, and Western Europe where gas prices are much higher. Over time those price differentials will decline because more LNG and piped gas will be flowing to the more profitable markets, hence putting pressure on prices.  Global gas prices will tend to converge, but not entirely given different extraction, production, liquefaction and gasification prices.

With greater integration there are also new risks to consider. Some of these include potential attacks on major LNG facilities as natural gas becomes a more vital part of the world economy and some countries. There are also increased risks that as the global markets get more integrated in natural gas, events distant from the United States could affect prices in the United States much like what happens now with oil markets.

There are great profits to be made from exporting the potentially massive amounts of natural gas (mostly shale gas), from the United States into these newly developing world markets. (The greatest profits can be made in the first years of the development of these markets prior to the lowering of prices in Asia, Europe and higher priced areas as the markets get integrated.)

However, nothing is ever certain and some planning and emergency regulations may be required to help potential shocks from entering U.S. markets. Complete immunity is not possible when a market is globalized, but with proper consideration risks might be mitigated. A very large natural gas strategic reserve system might be best built and filled when the natural gas is cheap for times when it may be less accessible (likely for the short run given how quickly shale gas pads and production can be set up).

Cyber Risks

According to Europol there have been many cyber-raids in 2012 on logistics and computer networks connected to container ships by criminal gangs to obtain the illegal drugs they had hidden in the holds of the ship. The gang truck drivers were able to find the containers, get the security codes, and were able to get the drugs off the ship without being caught. This could be the start of far more serious cyber-attacks on shipping and maritime logistical networks. The oil and gas industry is information intensive and it is hard to get around that. Computer systems, the internet, and other cyber-based devices and operations are key elements to the operations of the industry. For example, Saudi Aramco and many other oil companies in the Middle East region have been cyber-attacked in recent years.

In addition, cyber-attacks have both financial and real effects, including distortions in the prices of oil and gas. Hacking into the derivatives and futures markets could wreak serious havoc on the industry. Real effects could include attacks on SCADA (Supervisory Control and Data Acquisition) systems that control oil and gas pipelines. SCADA is also used in refinery operations.  If a container ship can be hacked, how far off is it when an LNG or oil tanker is taken over or hacked? Tanker traffic is often controlled and monitored via computer systems and the internet. Clever cyber warriors and others are likely trying to crack these systems (or potentially have even cracked them at times), but the industry would rather not discuss such events. It may be entirely possible to use something like STUXNET on affected SCADA systems to send the wrong signals to those trying to monitor the complex logistics of the shipping. A ship may be seen on the company’s monitor being one place, whereas it might be somewhere else. That is anyone’s guess, but I suggest that is not impossible. The new pirates attacking tankers may be cyber-pirates sending in malicious code, not just the barefoot Somalis and others tossing hook anchors on to the stern of the tanker and climbing up.

Cyber risk can also have considerable effects on the overall supply chains for the oil and gas industry. To get an oil rig, a refinery, a series of pipelines up and running takes a massive administrative supply chain effort that could involve sometimes hundreds if not thousands of subcontractors and suppliers that have to get things done in a specific order and on time. Anyone who has built a house or even had a kitchen remodeled knows how important it is to get the carpenters, electricians, masons, and roofers to be on schedule and in the right order. Now consider the complexity of getting all the right people, equipment and information on schedule and in the right order in the build out of a complex oil rig in 10,000 feet of water 150 miles at sea with millions of dollars (and maybe lives) at risk due to any scheduling mistakes.

A cyber-attack on major refineries and pipeline systems could bring costs that may seem unthinkable at the moment. However, this could just be a matter of time if the industry does not constantly update its protective systems and understanding of the risks. The industry remains constantly vigilant as hackers and cyber-warriors like the SEA (Syrian Electronic Army) are always looking for opportunities to attack. Constant vigilance will not be enough if one of these attackers gets “lucky” and gets through. The sophistication of cyber warriors and hackers is not static, nor should the sophistication of the oil and gas industry to counter these threats be static.

Note: All opinions expressed are those of the author alone. Sources supplied upon request.

Paul Sullivan is the Adjunct Senior Fellow for Future Global Resources Threats at the Federation of American Scientists and a Professor of Economics at the Eisenhower School at the National Defense University. He is also an Adjunct Professor of Security Studies at Georgetown University and a columnist for newspapers in Turkey and Mongolia.

Dr. Sullivan is an expert on resource security issues, with a special focus on the nexus of energy, water, food and land. He is also an expert on issues related to the economics, politics, and militaries in the Middle East and North Africa.