Iran, China, and Cyber Posses

The asymmetric tit-for-tat with Iran continues. A virus may have been used to attack oil terminal controls on Kharg, a strategically important island in the North Arabian Gulf. Whether this was actually a cyber attack, who conducted it, and for what purpose are currently unknown. Regardless, we can expect to see more of these sorts of non-kinetic strikes on maritime infrastructure globally.  The barriers to entry for cyber-attack are fairly low. Malicious code and TTPs are available in the open source and it doesn't take a computer science degree from a prestigious university to employ them effectively. CSBA's article on the democratization of violence elaborates.

This concept should be nothing new to ID readers as we’ve discussed open source (as defined by John Robb) naval warfare here on several occasions. Mr. Krepinevich accurately articulates the issues facing the United States via the proliferation of high technology warfare, including PGMs, cyber, bio, etc. But he provides little in the way of recommendations to counter this trend except a continued stay ahead of the Jones’ approach: “… the Pentagon will need to prove better than its rivals at exploiting advances in artificial intelligence to enhance the performance of its unmanned systems. The U.S. military will also need to make its robot crafts stealthier, reduce their vulnerability to more sophisticated rivals than the Taliban, and make their data links more robust in order to fend off efforts to disable them.”

A more proactive recommendation would be to permit, or even encourage non-government entities to take an more active, even offensive, role in defending their interests. The expectation for companies and individuals' to maintain domestic readiness and business continuity in the face of natural disasters has already been established. Many Americans and companies learned a hard, but predictable lesson following Katrina and other hurricanes last decade: the federal government, as large and powerful as it may be, is not agile enough to come to the rescue of every American in need. Similarly, commercial shipping companies were slow to realize that the First World’s expensive navies would not always be in the right place, at the right time, with the right ROE in the vast Indian Ocean to protect them from pirates, so they took matters into their own hands with embarked armed security guards.

Lately, American companies have come under attack from a variety of state and non-state actors. These cyber attackers, some sponsored by states with malign intent, others just self-organizing sophomoric thugs, place an increasing toll on the cost of doing business and the global economy. It should come as no surprise to most Americans that the computer experts with the maddest cyber-skillz likely don’t work for Uncle Sam’s Cyber Command and other government agencies and that the commercial sector will always be more nimble and responsive than the federal government. So then why shouldn’t Google, Cisco, etc. take an active role in offensively attacking the actors - both state and non-state - who disrupt their operations? When future attacks against a US commercial network occur, the private sector should go after the perpetrators with a vengeance -- counter-attacking with cyber, legal, and any other conceivable means until the threat is disrupted or deterred. Some might consider this anarchy, unecessary escalation, or a failure to accept rule of law. But in the face of an increasingly broad and dynamic range of threats to civil order, do we really have a choice?  As to possible future cyber-vigilante targets, here are one analyst's thought provoking ideas...

The opinions and views expressed in this post are those of the author alone and are presented in his personal capacity. They do not necessarily represent the views of the U.S. Department of Defense or any of its agencies.

April 6 Observations

North Korea

News sources has stated there will be 2 South Korean AEGIS ships, between 3 and 4 Japanese AEGIS ships, and between 4 and 5 US AEGIS ships monitoring the upcoming North Korean rocket launch. US and Japanese warships are suspected of carrying SM-3 anti-ballistic missile interceptors. As long as the rocket does not deviate from the announced trajectory, it is highly doubtful there will be any kind of shootdown. With the Rocket expected to fly over the Yaeyama Islands, which will likely feature either a US or Japanese warship in that area, things could get interesting. It is unclear if South Korea can shoot down a ballistic missile launched from North Korea even if they wanted to.

The North Koreans reportedly have 3-4 mini-submarines that have recently deployed from an East Sea base in North Korea. It is training season for North Korean submarines, but it was also training season for North Korean submarines when the Cheonan was sunk in March of 2010. The rocket launch is taking place from a base on the other side of North Korea.

With the frenzy of activity taking place related to North Korea, it has become more and more clear that Japan and South Korea are looking to send some punishment in the direction of North Korea. North Korea is being provocative, but that doesn't necessarily mean they have intent to escalate. China and the US appear to be working overtime to restrain everyone in the region, and of all the kinds of cooperation one could see in the 21st century from China and United States, it strikes me this is the most important kind.

Iran

From the New York Times:

A major Chinese ship insurer will halt indemnity coverage for tankers carrying Iranian oil, beginning in July, two of the insurer’s officials said Thursday, amid tightening Western sanctions against Iran and after similar action in Japan.

The decision by the insurer, the China P&I Club, is the first sign that refiners in China, Iran’s top customer for crude oil, may struggle to obtain the shipping and insurance to keep importing from Iran. Iran’s other top customers — India, Japan and South Korea — are running into similar problems, raising questions on how Tehran will be able to continue to export the bulk of its oil.

The price of Brent crude oil is up 16 percent since the start of this year on concerns that Iranian supply may be disrupted because of Western sanctions.

The China P&I Club, whose members include shipping companies like Sinotrans and Cosco Group, is the first Chinese maritime insurer to confirm that it will halt business with tankers operating in Iran.

China doesn't say no to money without a good reason, particularly when they have a monopoly. It is unclear if this is a result of sanctions working as intended, or the State Department working overtime - but either way this is quietly a significant victory against the Iran regime as part of the Obama administrations policy of diplomacy in dealing with the Iranian nuclear program. There is, of course, a disturbing flip side to this. Insuring the flow of oil to China would, in theory, be a major political consideration by Iran that would usually discourage the Iranians from closing the Strait of Hormuz during hostilities. This development is a double edged sword, on one side this applies tremendous economic pressure on the energy sector of the Iranian economy, but on the other side it removes a key incentive that would normally dissuade Iran from closing the Strait of Hormuz during hostilities.

Saudi Arabia

Based on latest figures from the Department of Energy (FTP), the US imports a daily average of 1,470,000 barrels of oil, which averages out to about 44.7 million barrels per month. We have already discussed Saudi Arabia chartering 11 VLCCs and sending that oil to the United States, and each of those VLCCs is expected to bring about 2 million barrels per vessel. It appears that was just the beginning, and Saudi Arabian state owned Vela has chartered 3 additional VLCCs for the same purpose. 14 VLCCs each carrying 2 million barrels means the United States is expected to import at least 28 million additional barrels of oil from Saudi Arabia over the next two months. That is slightly more than a 30% increase in US oil imports from Saudi Arabia for April and May.

All news reports on this activity are quoting analysts who believe this is the beginning of a major program. This seems very odd to me. Saudi Arabia recently ramped up production by 1.5 million barrels a day, but that ramp up was primarily done to compensate for oil expected to be lost from market due to sanctions from Iran, who was last known to export around 1 million barrels a day. That increase in production also takes time, and can't simply be turned and off like a light switch. It is also worth noting that Saudi Arabia has not decreased export of oil to any other nation, meaning this is all additional oil on the market. For Saudi Arabia to ship out 28 million barrels in a massive VLCC charter program in such a short period of time, they would have to draw that oil from standing stock. If this program is simply ramping up to something bigger, and more VLCC charters are expected, that means Saudi Arabia has begun a program that essentially transfers their existing standing stockpile of oil to other nations.

It is very difficult to imagine that Saudi Arabia would ship their standing stockpile of crude overseas without a damn good reason - a much more important reason than some Presidential election in the United States. Indeed, if one was to start listing all the plausible reasons why Saudi Arabian leadership would give up the very commodity that gives them their political power and influence globally, the only reason that makes any sense at all is that the Saudi Arabian leadership must believe those standing stockpiles of oil are facing legitimate risk.

While I am aware that Saudi Arabia holds offshore stockpiles of around 10 million barrels in Rotterdam, Sidi Kerir, and Okinawa; does anyone know how big the stockpile of oil is in Saudi Arabia?

If we continue to see the VLCC program expand and more oil continues to be shipped out at a rate greater than the rate of accumulation, the most plausible scenario is that the Saudi's must believe war is about to break out over the Middle East, and for some reason the rest of us can only speculate about, Saudi Arabia believes they will be a target in such a war.

More Tea Leaves

The Navy is moving a substantial amount of equipment to the Persian Gulf that if used, would be done specific in combat against the capabilities fielded by Iran. I am simply highlighting that fact about the MIW shift to the Gulf or other recent military orders reported in media this week; not trying to start a conspiracy theory.

So maybe this other relevant activity is just a coincidence, but even as a coincidence it is very interesting. Lets start with China.

The government on Tuesday raised retail prices for gasoline and diesel fuel for the second time in less than six weeks in an attempt to keep pace with soaring crude oil prices.

Chinese motorists are now paying $4.43 a gallon for 90-octane fuel — nearly equal to the $4.45-a-gallon average for mid-grade fuel in California, according to AAA.

The reason provided is found later in the article.

The increase should ease pressure on China's two main refiners, the state-owned China Petroleum & Chemical Corp. and PetroChina Co., which are not allowed to pass costs on to consumers. The two have reported losing billions of dollars already because of soaring crude prices.

In other words, China is not having a supply or a demand problem right now, what they are having is a 'losing money' problem because of the current high costs - and because China price fixes their fuel, they must price fix it relative to the global market.

Long term I think everyone recognizes that China's demand is going to go up, but right now supply and demand isn't the issue - there are no supply problems with China even with Iranian sanctions. Raising the cost of gas and diesel will insure that supply will go up because by any measurement - this is a fairly significant cost increase for fuel for the average Chinese citizen. Also worth noting, China has not cut back any orders for fuel from any of their import sources, so despite less demand in the near term China will be stockpiling rather than reducing supply.

So if China is reducing demand, why is Saudi Arabia ramping up supply?

Saudi Arabia’s state shipping company, Vela, is set to send 11 supertankers, totalling up 22 million barrels of crude oil, to the U.S. this month and next, an abnormally high number, shipbrokers and analysts said Friday.

“This is the first time in several years for Vela to hit the market with such volume-and in such a short timeframe,” Omar Nokta, managing director at Dahlman Rose & Co., told Dow Jones Newswires. “In 2011, Vela fixed 1 VLCC to the U.S. every other month.”

Vela wasn’t immediately available to comment.

According to the International Energy Agency, Saudi Arabia’s oil production rose to 10 million barrels a day in February, its highest in 30 years. The Kingdom is expected to continue to increase output in the coming months, the IEA said in its monthly oil market report published Wednesday.

I know what you are thinking... this is an effort to bring fuel prices down and pick up the slack for Iranian oil cut off by sanctions and problems in South Sudan, but that simply isn't true. OPEC data shows that those problems were previously absorbed with other measures and they consistently claim the price for crude is artificially high. A lot of analysts continue to say that as well, and Bryan Walsh mentioned that specific point in his TIME column the other day.

Right now much of the recent price spike is due to tensions with Iran, a major oil producer. War with Iran is a real possibility, albeit an uncertain one, and if the missiles were to fly, we could easily see a price spike of $50 a barrel or more. So traders and major oil consumers are stockpiling crude now as a hedge against that very situation, which in turn drives the price up now by artificially inflating demand.

Emphasis mine. There is no supply problem. Because while margins are legitimately tight (they always are these days), it has been noted in several places including the Financial Times that there is a lot of hoarding of crude right now taking place globally, in particular Europe. Now we are seeing a "wall of ships" heading for the United States. It is being said that this is part of an Obama administration plan to bring the price of oil down, but that is hard to believe, because the Obama administration knows that isn't going to work. Shipping in more crude to the US isn't for the purpose of increasing supply on the market - rather increasing the supply in reserve.

Why does the Obama know that won't work? Because for the last few weeks politicians have had more than a few open discussions with experts on the topic and it has been specifically asked whether more crude in the US would reduce prices - and every expert has agreed it would not. The problem in the US isn't the supply of crude, it is the capacity of refineries.

With the East Coast poised to lose 50 percent of its oil refining capacity, three members of Congress on Monday worried that while the country is producing more of its own crude oil, it might grow more dependent on other countries for gasoline and diesel fuel.

Pennsylvania Congressman Pat Meehan hosted a panel of energy experts for a field meeting in Aston, Pennsylvania, of the Committee on Homeland Security.

Meehan and two other legislators, Congressmen John Carney from neighboring Delaware and Mike Fitzpatrick from Bucks County, Pennsylvania, peppered the experts with questions about fuel prices and logistics as well as national security.

Two refineries in the Philadelphia area have closed in recent years, and a third is scheduled to close this summer.

A massive delivery of crude from Saudi Arabia to the US - which is about to happen - is not going to impact fuel prices at all. All it does is add increased supply as a reserve, because refinery capacity is full and cannot actually use all this extra crude coming to the US. Said another way, we are hoarding supply, not for use to bring prices down (which is impossible without more refineries), rather to have in case of delivery disruption.

Then you have the rumors that the Obama administration is going to release from the Strategic Petroleum Reserve to help address fuel prices. I don't believe it, rather I think the idea is being floated to calm investors. Every time they are asked, the International Energy Agency (IEA) says there is not need to release stockpiles because there is no supply crunch.

So why are the big energy importers in Asia, Europe, and the US hoarding crude supply? Why is the US suddenly shifting naval resources to the Persian Gulf specific to capabilities of Iran? Isn't a massive delivery of Saudi Arabian supertankers to the US at a time we lack the refinery capacity to actually use all that crude quickly exactly what stockpiling for war looks like?

I think it is a frightening thought what is going on, only because of what I believe these events are telling me as an observer. The sanctions on Iranian oil are in place. It will take a bit of time, likely 3-6 months, to get a feel whether they are working or not. During that 3-6 months period, it is extremely unlikely anything is going to happen, except that production is going to get very high and everyone is going to stockpile around the world.

So tell me this. What is the intelligence assessment of major oil importers telling those nations political leaders in the US, China, and Europe about what Israel is likely to do if it becomes clear the oil sanctions against Iran - said to be the most potent type of sanctions - aren't working?

I don't care what the folks in Tehran are saying publicly, there is no way they are oblivious to what the tea leaves are suggesting is going on. The Obama administrations diplomatic moves have begun ahead of negotiations with Iran, because the precautionary actions the US would need to take ahead of war with Iran are being taken and written daily in plain sight of major newspapers for all of us to see.

The media can claim this is the Obama administrations grand plan to bring down gas prices, but since the Obama folks know they can't actually saturate the market due to lack of refinery capacity - I reject the popular media rhetoric that this is just Obama administration politics. At no point in the last 3+ years has the Obama administration demonstrated their plans are stupid and are designed knowing that failure is the result. If the Obama administration is involved in hoarding supply on supertankers from Saudi Arabia, it is being done so they are damn sure they have that stockpile when they need it.

Keep in mind, the only legitimate reasons the US would need that extra supply is if the economy suddenly shoots off like a rocket over the next 6 months (very unlikely) thus demand increases significantly, or if the supply chain is disrupted. Which do you think is more likely?

If I'm off base here, I'm very happy to be wrong. Hard to ignore what's happening though.

Defending Iraq’s OPLATs - End of an Era

The final British patrol has departed Iraq’s Khawr Al Amaya and Al Basrah Oil Terminals (KAAOT and ABOT) in the North Arabian Gulf. American Sailors are still engaged but will join the Brits later this year as the Iraq withdrawal progresses. From the time of their initial capture by NSW operators in March 2003, to the rapid hand off of security to USMC FAST, USCG Port Security Units, and the establishment of a long term presence by (then) Naval Coastal Warfare and MESF forces, thousands of active and reserve American and British Sailors, Marines, and Coasties have played a key role in defending the lifeblood of the Iraqi economy. A few even gave their lives.

Some observations on this mission:

- MSO is an enduring sort of mission - once started, it’s hard to stop. Aside from the oplats, a significant portion of the NECC’s security forces have been tied down since 911 protecting SPODs and friendly shipping in CENTCOM. Even as some of these missions draw-down, these capabilities should remain intact, as they are versatile and difficult to reconstitute in the event of a crisis. MESF is an economy of force capability, and with a little imagination, the squadrons bring utility outside of force protection such as support to HADR operations and FID.

- A related lesson is that cutting the umbilical and turning over operations (completely) to a foreign partner can be challenging. The complete withdrawal from the OPLAT has been delayed several times. It's time for the Iraqis to sink or swim.

- Although numerous CRUDES and Gators supported the defense of the OPLATs and the Sailors on them, the work horses of this mission were the USN PCs and USCG WPBs. The OPLATs are situated amidst a complex environment of shoal water, heavy small boat traffic, and international sea boundaries. Some missions were made for smaller, more nimble, shallow draft vessels, and putting a multi-billion dollar capital vessel at risk is a misuse of assets at best. The PCs have been rode hard and put away wet, and are beyond the end of their service lives. A replacement is nowhere to be found in USN acquisition plans.

- ISR over-watch is a critical component of MSO. For a variety of reasons, UAVs were chosen for this mission in the NAG. However, other systems should be considered to maintain persistent surveillance over ports and offshore platforms, including fixed aerostats, like those made by this company or this one. These tactical aerostats (unlike those currently in use for base protection in Afghanistan) are affordable for smaller navies.

- At the strategic level - putting all of one’s eggs in the same critical infrastructure basket is a recipe for disaster. The Iraqis (and consequently the US) were very lucky that there was only one viable attack attempted on the platforms over the past 8 years. Systems disruption attacks, especially against oil infrastructure, have become widely understood by insurgents and terrorists globally as a low risk/high return tactic. Given growing global offshore oil infrastructure, it’s likely the US Navy will find itself involved in MSO again sometime in the future, whether in a lead or supporting (train/equip/advise) role.

The opinions and views expressed in this post are those of the author alone and are presented in his personal capacity. They do not necessarily represent the views of U.S. Department of Defense, the US Navy, or any other agency.

On the Cost of Protecting Oil Supplies

I am increasingly becoming a fan of both Foreign Policy magazine and its website.  Here's an interesting article by a New York Times Magazine writer that attempts to lay out the costs associated with the US military's obvious but rarely spoken mission of ensuring a steady world flow of oil.  I am no financial analyst, so I can't tell how close the numbers he cites are--but even if they were high by half, we're still talking a lot of money.  That's right--protecting the world flow of oil costs a lot of money, and American taxpayers are footing most of the bill.  For those of you on the left, that's money that isn't going to progressive causes.  To those of you on the right, that's YOUR money that has been separated from you.  Anyone familiar with my writing here or elsewhere should know that I'm not particularly bothered at the notion of spending even MORE on our ability to protect the flow of oil, among other Naval missions.  But the dirty little secret of my ardent navalism is that I would be hard pressed to justify more resources for the Navy if America weren't as addicted to oil as it is.

I make no value judgments on the use of oil in the United States.  Sprinkled among the ridiculous Israel bashing/loving found in the comments to the cited story, is one defense of oil that I found compelling--and that is, that oil has been and will continue for the near future to be that which drives our economy.  That the economy continues to be the world's largest, that it remains the engine for world economic health (China's economy is a fraction of ours, still), should be reason enough to tie the continued access to oil with continuing investments in naval power.  We're simply not going to wean ourselves from oil anytime soon, and if we want to remain a global ECONOMIC power, we need to remain a global NAVAL power.

But how different would our strategy, force employment and force structure be if we (the US) were NOT as addicted to oil as we are?  There's a PhD in the answers to that one.

For the moment though, I make the following observations:

1.  We are dependent on oil and will be for decades to come.  Continuing to invest in robust naval power designed at least in part to ensure the free flow of oil to world markets is a critical national security interest.

2.  In the pursuit of defending that flow, we are beholden to many countries with views of modern America that are at best, dubious, and at worst, hostile.

3.  Our addiction to foreign oil fattens regimes who are with one hand, accepting our cash, and with the other, funding the world-wide Islamic Jihad.

4.  (Here's where things take a course change--stay with me)  Continuing to beat the American public over the head with the science of climate change is not going to drive people to change their habits.  Too many people are aware that the dinosaurs lived in a warmer world than we, and that there have been ice ages.  They believe that CLIMATE CHANGES whether humans contribute or not--irrespective of the evidence.  As a behavioral change model, CLIMATE CHANGE is a loser and it will not result in the policy aims it is put forward to support.

5.  National Security however, is an effective model for behavioral change.  Effective leadership in this country would talk about our dependence on oil as a NATIONAL SECURITY CHALLENGE--citing the bad actors on the other end of the transaction, their stated aims, and their ideological bent.  Might we have spent $7.3 trillion on defending the flow of oil from 1976-2007?  Maybe--who knows?  But we all know we're spending SOMETHING to do that, and we all know it must be a considerable sum.

So--in summary.  We spend a lot of money on (predominately naval) forces that are employed to protect the flow of a commodity that undergirds our prosperity.  In the meantime, we fatten the coffers of those who would do us harm and even as we drain our own accounts in protecting that flow.  Were we to communicate more directly with the American people--the real costs of the dependence on oil--we would go much farther in generating the behavioral changes necessary to end it, and there would be more support for government policies designed to usher in that end.


But instead, we try and convince Americans that if we don't switch to solar energy, in 600 years someone living in Salem, New Jersey might not be able to live in Salem, New Jersey. 

Moving toward energy independence is the grand unifying theme of the future of American politics.  It is a defense issue, an environmental issue, a technology issue, a commerce issue and an educational issue.  Hanging its pursuit on ephemeral slogans like climate change is inappropriate to the magnitude of the challenge and the sacrifice needed to achieve it.  Energy independence is primarily and most importantly, a national security issue, and it should be spoken of as such by our leaders at every opportunity.  If in the process of moving toward renewable and non-carbon based fuels, we arrest man's contribution to climate change, that's all the better.

Cross-posted at The Conservative Wahoo

Bryan McGrath