Strategic Outlook

A National Strategy for Global Supply Chain Security

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The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

At what cost certainty?
                                   Certainty at what cost?

Last year, the Obama Administration released its first-ever National Strategy for Global Supply Chain Security. As stated, the main goals of the strategy are to promote the efficient and secure movement of goods and foster a resilient supply chain. Maintaining a secure and resilient supply chain is certainly critical to ensuring the prosperity of the United States’ economy. However, existing legislation governing maritime cargo transit and port security directly contradicts the goals of this strategy.

In 2007, Congress mandated that 100 percent of the approximately 32,000 cargo containers entering U.S. ports each day be screened. The feasibility of this mandate has been questioned by security experts from day one.

In seeking to establish a workable alternative, Congress should consider supply chain realities in fostering a risk-based approach to maritime cargo security.

Given the extensive economic importance of the maritime supply chain, the vulnerability of maritime cargo to terrorist and other malicious attacks has long been a concern. With this concern heightened after 9/11, Congress and the Administration moved to create a risk-based approach to strengthen maritime security centered on analyzing cargo attributes, such as contents and origin of the cargo container, to single out high-risk cargo for further inspection.

By 2006, however, Congress turned sharply away from the risk-based approach with the passage of the Security and Accountability for Every Port Act, which called for testing the feasibility of scanning 100 percent of U.S.-bound cargo, a requirement that was fulfilled though the creation of the Secure Freight Initiative pilot program.

While the program showed that “scanning U.S.-bound maritime containers is possible on a limited scale,” major challenges existed in expanding 100-percent scanning to all 700 international maritime ports handling U.S.-bound cargo. These findings, however, would be disregarded, and Congress moved to mandate that 100 percent of all U.S.-bound maritime cargo be scanned by July 1, 2012—prior even to the pilot program’s completion.

Proponents of the 100-percent mandate have pointed to the supposed success of mandating 100-percent screening of air cargo. Besides the fact that this screening was limited to domestic cargo—screening of U.S.-bound international cargo proved much more difficult—and that a significantly greater volume of cargo transits through the maritime supply chain, another critical difference is that the air cargo security mandate called for the 100-percent screening of all cargo, whereas the maritime cargo mandate calls for 100 percent scanning.

While screening calls for cargo to be assessed for risk on the basis of contents, origin, and other attributes, scanning means that each of the approximately 10.7 million maritime cargo security containers entering U.S. ports each year must be physically scanned. The growth of maritime cargo containerization in recent decades means that typical maritime cargo containers often measure some 40 feet in length. One key issue regarding screening maritime cargo is, therefore, one of scale. While the basic technology exists to effectively screen cargo containers, the expanded technology necessary to perform this function on the larger forms of containerized cargo largely does not.

Cost and infrastructure are also important factors. A single x-ray scanner, the most common technology used for cargo screening, can have a price tag of $4.5 million, plus an estimated annual operating cost of $200,000, not to mention the roughly $600,000 per year for the personnel required to run the equipment and examine the results. Likewise, the mere placement of scanners can also cause logistical problems, as many ports were not built with natural bottlenecks through which all cargo passes. With today’s economy relying heavily on the timely and efficient movement of goods, such delays could amount to around $500 billion in total profit loss. And once scanning technology is installed, it may encounter multiple problems, such as incompatibility with previous technologies, outages due to weather, and insufficient communication infrastructure to transmit electronic data to the U.S. National Targeting Center-Cargo, where it is assessed.

A large part of the post-9/11 anxiety regarding maritime cargo security has centered on the “nuke in a suitcase” scenario, an extremely low probability event. The vast majority of cargo traveling through the maritime supply chain consists of legitimate goods. The 100-percent maritime screening mandate, however, fails to recognize this reality and instead treats every piece of cargo as a genuine threat.

Congress should rethink the 100-percent cargo security mandate and instead return to a risk-based approach to cargo security, centered on analyzing manifests and other data, to single-out only high-risk cargo for further inspection. Ensuring the security and prosperity of the maritime supply chain is simply too important for Congress not to get this right.

Emil Maine is a National Security Research Assistant at the Heritage Foundation, where he conducts independent research on U.S. defense posture. The views and opinions expressed in this article are his own.

Beans Boots Bullets

Gooey Kablooey: How Agro-Terrorists Will Destroy You By Destroying Your Food

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 The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

It's the one to port
                           Cargo ships in San Francisco harbor. Is one of them out to ruin your dinner?

Sometime in 1843 or 1844, a ship most likely from Baltimore, New York, or Philadelphia landed in a European port. Among the seed potatoes in its hold was the North American fungus Phytophthora infestans. The resulting potato blight swept across Europe, and when it combined with the abominable agricultural policy in Ireland, the outcome was nearly a million dead and a 25 percent reduction in population if including emigration. 

Last year, around 25 million food shipments entered the United States, primarily by sea, but only roughly two percent of them were inspected by Food and Drug Administration agents, and nearly all of these inspections occurred on U.S. soil (the largest share at the massive port of Los Angeles). Meanwhile a 2012 report by the Centers for Disease Control shows that from 2005 – 2010 at least “39 outbreaks and 2,348 illnesses were linked to imported food from 15 countries”, and that “nearly half (17) occurred in 2009 and 2010.”

The fact is, importing foods to the United States is not only big business, it’s risky business. Food imports almost doubled from 1998 to 2007, with much of the growth in fruit, vegetables, and seafood; and agricultural inspections have struggled to keep up. While the Food Safety Modernization Act passed by Congress in 2010 allowed for the implementation of the computerized Predictive Risk-based Evaluation for Dynamic Import Compliance Targeting (PREDICT) system, a human inspection is still required to render a verdict. 

But there’s more. The introduction of blight or disease into the food supply of the United States would be a major long-term success for an adversary. That’s right, agro-terrorism is real and you should be worried about it. A subset of bioterrorism, agro-terrorism is the introduction of an animal or plant disease with the purpose of causing economic, health, and social damage. The seemingly low shock value of the topic means less public attention, but it is real enough that former Secretary of Health and Human Services Tommy Thompson gave a warning speech on its dangers—and was eviscerated for calling attention to the risk for adversaries. 

The problem is that the United States’ food supply really is vulnerable to agro-terrorism. In terms of targets, the agricultural sector is an easy mark due to modern livestock-raising methods; their feed preparation and distribution process; the geographically dispersed location of farms and ranches; and the relative safety of handling animal and plant pathogens by a human.

The low inspection-rate of imports coming by sea, and relatively smaller dollar amounts going to security for those imports, provide perhaps the safest vector for the undetected transmission of a pathogen. An adversary could rely on blind luck, transporting tainted food and hoping that it is added to a distribution system to achieve limited results. But an organized network could be more deadly by using existing sea routes for transport of contraband to smuggle pathogens to a recipient within the United States for more targeted distribution. Just as trafficked drugs or persons slip past the low inspection capacity of Customs and Border Patrol, pathogens infecting food could land in the hands of a determined adversary. 

What would the effects be of such a pathogen? Economically, the calculation is complicated. The 2001 foot-and-mouth outbreak in the United Kingdom, probably caused by the illegal import of tainted meat that was subsequently fed to pigs, is estimated to have cost that government $13 billion, including second-order impacts to businesses and restaurants dependent on the sale of livestock. But this figure does not include the cost of lost exports from the meat embargo immediately imposed by Britain’s trading partners.

In the United States, where the CIA World Factbook estimates the agriculture sector makes up $172 billion of the nation’s 2012 GDP compared to the United Kingdom’s $17 billion, the second and third order effects would be even greater. A 2002 limited study by National Defense University estimated that an outbreak of foot and mouth disease restricted to only ten ranches in the United States would cost up to $2 billion in cascading effects. A widespread outbreak would be orders of magnitude greater.

The health effects for citizens are more obvious, if only because of the legend of the Irish Potato Famine in the mythos of America’s development. But as with all forms of terrorism, a small death toll is all that’s needed to cause widespread panic. A 2005 outbreak of E. coli related to bagged spinach killed but three and sickened about 250, yet spread fear (and excuses for subbing fries for salad) across the country. If such as scenario was followed by a public statement from the responsible party, with promises of additional attacks, the response could collapse confidence in the entire food system, resulting in wide-spread loss of jobs and cascading social unrest. 

So what’s an American to do? The short answer is “not much.” The sheer volume of transported goods, the importance of the human element to detect agriculture disease, and the necessarily quick transfer of perishable items make stopping agro-terrorism before it occurs a near impossibility. Like many other forms of asymmetric attack, a determined adversary will succeed.

One thing that can be done is preparation to mitigate the effects of such an attack. The long-delayed National Bio and Agro-defense Facility (NBAF) took another lurching step forward in the FY14 Homeland Security Appropriations Bill in both the House and Senate. Designed to be one of the most sophisticated laboratories in the world, it would study the most dangerous pathogens in hopes of finding antibiotics or resistants to limit the damage an outbreak could cause.

Multiple Homeland Security Presidential Directives also require Federal and local coordination preparations and plans to respond to an agro-terror attack. In most cases, mitigating the effects of such an attack will require identifying the pathogen, containing it, and then taking steps to destroy it before it can escape from the containment zone. These steps can only be taken in time with prior coordination and practice.

Finally, we need to do what the Irish couldn’t—be able to quickly tell which ship, at which port, and from which point of departure carried the blight. While impossible to inspect every cargo container, with a concerted effort the United States can establish a system that provides more efficient and effective tracking of the containers themselves over the course of their travels, from loading to unloading. Shedding more light on their journey creates a less-hospitable route for potential practitioners of malfeasance.

Sherman Patrick is a Senate staffer working on national security issues. The views expressed in this article are his alone.

Tactical Concepts, Uncategorized

Cruisin’ for a Bruisin’

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The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

International Maritime Shipping Week requires us to invert our usual thinking – instead of considering threats to merchant shipping, we look at how supposedly innocuous ships threaten the broader world.

What could be more innocuous than cruise ships?

Hundreds of sun-chasing, fun-seeking tourists accompanied by a staff of well-dressed entertainers, professional food service staff and smiling sailors. Nothing could possibly go wrong…

Before I continue, I should note (in what I’m sure is a standard disclaimer for International Maritime Shipping Week) that cruise ship companies are very professional organizations, and I am in no way impugning their ability to keep passengers and property secure. The scenarios proposed herein are entirely hypothetical.*

Now to business.

Cruise ships are different from all other shipping in one important respect – their passengers. Any plan to use the cruise industry as an avenue of attack should take advantage of this. To ignore the passengers would be to give up a potential asset and also inject too much uncertainty into terrorist planning, since sometimes people stumble onto things unexpectedly(as recent reports suggest may have been the case aboard the Achille Lauro in 1985, when the crew’s inconveniently-timed delivery of complimentary fruit caused the four Palestinian hijackers to improvise actions for which they were ill-prepared, according to The Independent [UK]).

 

Threatened world with Leonardo DiCaprio. World surrendered.
               Threatened world with Leonardo DiCaprio. World surrendered.

One tactic would be to use passengers passively. Packing hundreds or thousands of individuals aboard a ship provides a terrorist his key asymmetric asset – anonymity among the masses. Additionally, a cruise ship brings together large numbers of people who don’t know one another and would have no idea if a particular individual belonged aboard or not. A terrorist can hide in plain sight aboard the ship during transit in a way that wouldn’t be possible aboard a cargo hauler, where any unfamiliar person is immediately apparent. Then, upon arrival at his target port, he can disembark and simply disappear into the country to make mischief. The crew would surely notice a passenger’s absence, but not until all the tourists had been accounted for, and by then the subject would be long gone.

Imagining a more active scenario, passengers could be used as hostages or human shields as cover for some greater plan. Whatever the terrorists may have in mind, authorities will be reluctant to storm aboard the ship when the threat of civilian casualties is high. This may buy enough time for the hijackers to use the cruise ship itself as a weapons platform or as a diversion to enable some other operation to go forward – such as sending operatives ashore in small craft, as in the 2008 Mumbai attack.

More sophisticated, and potentially far more damaging, would be to use the passengers themselves as threat vectors. A terrorist could infect a cruise ship with a slow-acting pathogen, for example. Passengers would walk off the ship unaware of any symptoms and go to their homes all across the country. Only after their trip would the biological weapon begin to manifest itself – and spread. Conceivably this could be done with computer viruses, as well, though it’s not immediately clear why attacking cruise ship passengers as opposed to some other group would be worth the trouble. But where there’s a weakness, someone will exploit it, and the concentrations of people on cruise ships present a juicy target for the initial phase of a “viral” attack.

That said, the most likely malevolent use of a cruise ship is a good, old-fashioned hijacking in the name of propaganda. Cruise ships offer an enormous number of hostages and are media magnets when trouble hits – review the coverage of the Costa Concordia or the Carnival Triumph, turn it up to eleven, and then add the political and diplomatic ramifications that would result. Hijacking a cruise ship may not be innately useful (possible grounds for a later post), but in skilled hands it can cause many global second-order effects far bigger than the fate of one little ship.

You’ll never see “The Love Boat” the same way again.

 *According to CIMSEC’s crack team of attorneys, by using the word “herein,” I’ve given this disclaimer legal weight.

 

LT Matt McLaughlin is a strategic communications consultant and Navy Reservist whose only cruise ship experience is touring Titanic: The Exhibition. The opinions expressed herein do not represent those of the Department of Defense, Department of the Navy or his employer.

Beans Boots Bullets

The Great Oil Contango of 2008-2009 & Maritime Security: A Retrospective

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Oil storage commodities swinging at anchor in idled VLCCs.
                                                                     Fill ‘er up! 

The following article is special to our International Maritime Shipping Week. While we often discuss the threats to maritime shipping, this week looks at dangers arising from such global trade, and possible mitigations.

It sounds like a variant of a famous and complex Latin dance, but Contango is actually a financial phenomenon involving the trading of futures-based commodities. For the layman it goes like this: take a product such as crude oil. If you buy it now, you pay X, the “spot price”. Due to market conditions, you’re confident that a year from now you can sell it for a higher price of X+, the “future price”. Such a situation is a Contango. To take advantage of it you sell contracts now to purchasers willing to take the commodity at the future date, price, and quantity. You are now a speculator or “arbitraguer”. The challenge becomes storing enough of it until that time comes to deliver the agreed commodity. As long as storage and other overhead costs didn’t exceed X+ (the “spread”), you turn a profit.

Like many historical events, the so-called Oil Contango of 2008-2009 was a the result of several factors:

  • The first year of the Global Financial Crisis had passed and the effects were being felt in full, namely low consumer spending and unfavorable market conditions (sub-prime mortgages, credit collapse, etc)
  • OPEC was reluctant to reduce production rates for fear of sending the already unstable markets into free-fall – the surplus was growing at a rate of 1 to 2 million barrels daily
  • The resulting oil glut combined with low spending because of the crisis resulted in a low spot price (X), but with an expectation of a higher future delivery price (X+) as the economy slowly recovered

The key of for those willing to do business was to find storage at cheap enough prices that made large purchases of oil contracts profitable. Here’s where history becomes stranger than fiction. The glut literally overran land-based storage facilities. In the United States, a small Oklahoma town called Cushing is considered the benchmark for crude oil as traded on the New York Mercantile Exchange. It’s status is derived from being a primary hub connecting many delivery points within North America, and it’s maximum storage capability is approximately 42 million barrels (about 10% of U.S. oil production). At the time of the Contango, it cost approximately $1 a barrel per day to store crude there. But the oil glut had a big side effect – a lot of tankers were idled, and thus their operating prices declined. Around November of 2009, the daily rate for a million barrel capacity crude carrier was $10,000 a day at it’s lowest. The profit “spread” looked to be about $10 a barrel. Those market conditions made it very attractive for firms with the wherewithal to take full advantage of the Contango.

No one turns down Mr. Gere for a dance Contango.
                    Care for a dance Contango?

And what a list of arbitrage firms there were – Citibank, Morgan Stanley among them. While banks are typically loath to touch anything but paper instruments of commodities (i.e. not purchase the assets themselves), here they were directly chartering any decent-sized vessel capable of holding a million barrels or more. These were some of the very same institutions that took it on the chin during the Global Financial Crisis, and had every incentive to make up for their losses.

The result is a sweeping trend of world-wide seaborne oil-storage. In the end, all the tankers that the various arbitrage players could get their hands on could have formed a 26-mile long convoy of Very Large Crude Carriers (VLCC), totaling about 130 million barrels, or a little over 12 times what would normally be found at sea at any given time in recent history. All of it swinging at anchorage in major ports around the globe, for a year or more. The maritime security implications are numerous, and represent challenges for consideration.

With that much crude afloat and idle, the period of The Great Oil Contango presented one of the largest and most tempting targets for terrorist and other actors to strike and prolong what was already an immensely unstable global financial crisis. The risk potential was heightened by the fact that the glut easily overwhelmed the best efforts of ashore storage locations such as Cushing to supplement their capacity, adding anywhere from 5-to-10 million barrels of space.

The second-order effects are worth noting too: First, the chartering frenzy impacted not only the industries that used crude carriers, but spilled over to other sectors as firms moved beyond floating tankers and hired other types of ships for their storage capacity. Second, oil refineries eventually had to shut down or reduce shifts as OPEC and other oil producing concerns acknowledged market forces and cut back production output.

The potential environmental and safety impacts of that much oil afloat is staggering. As a comparison, the worst spill in modern history is the Deepwater Horizon well disaster – which sent about 90 million barrels into the Gulf of Mexico, devastated the U.S. southern coastline and surrounding waters, and required two years to complete major cleanup operations. The number of ships filled to the brim also increases the risk of partial spills and fire/collision hazards during the offloading, such as ship-to-ship transfers.

The Contango also caused an unintended and negative effect on the Strategic Petroleum Reserve (SPR) – several countries released their SPRs because of the market’s perception that there wasn’t enough oil in distribution – that was true – to the extent that much of it was being set aside by the arbitrageurs. While the SPR technically increased the amount of oil available on the market, it also further drove down the Spot Price (X), thereby increasing the “spread” or price differential of the Futures Price (X+). Therefore, there the incentive for abitrageurs to release any of the oil they already had was further reduced. In fact, by releasing the SPR, those nations put at risk their capability to respond to a crisis such as a wartime footing where energy to power the military is most needed.

Historically, the Contango ended, or more accurately declined, when too many arbitrageurs entered the market and wiped out the remaining availability of product, driving up prices. By doing so, they reduced the price “spread.” Additionally, the particularly harsh winter of 2010 made it attractive to unload stockpiles and cash-in as fuel demands were at an all-time high. Finally, a regulatory investigation by the U.S. Commodities Futures Trading Commission (CFTC) on practices such as the oil-storage trade convinced investments firms and traders to move on to greener pastures.

Lessons Learned: the vagaries and complexities of the modern financial market have many effects, most of them unpredictable, especially when dealing with energy supplies. In 2008-2009, several factors came together that not only artificially imposed limitations upon the world’s oil supply, but had indirect effects upon world shipping and national petroleum reserves. What was also interesting to note is that as instability began to threaten traditional supplies of oil (say the Libyan Uprising), the market price spread started to narrow as consumers were more than willing to pay an elevated spot price for energy now. The Contango also highlighted the growing influence of non-state actors such as corporations and financial firms to indirectly influence the availability and price of oil. Previously, the oil commodity market was a reasonable reflection of global supply and demand, the presence and practices of OPEC notwithstanding.

Surprisingly, for the time period during and shortly after, there wasn’t a lot of open-source intelligence or even published articles on the strategic and security implications of The Great Oil Contango. Everyone appeared to be focused on the monetary and market impact, but little else. It behooves us as industry professionals and observers to be aware of these developments and understand better the linkages to strategic security and public policy. One future trend we can expect is the greening of major navies as nations seek to minimize energy supply impacts to their foreign policy and military capabilities.

Juramentado is the pseudonym for Armando J. Heredia, a civilian observer of naval affairs. He is an IT Risk and Information Security practitioner, with a background in the defense and financial services industries.  The views and opinions expressed in this article are those of the author, and do not necessarily represent the views of, and should not be attributed to, any particular nation’s government or related agency.

Fostering the Discussion on Securing the Seas.