Oil prices have already pulled back from their surge following last weekend's drone attacks on Saudi Arabia's oil infrastructure. This has led some to say "See, it's a big nothing-burger."
I believe they are seriously missing the point and underestimating the implications.
These attacks are unprecedented in the history of the global oil industry. These attacks against one of Saudi Arabia's largest oilfields and the world's biggest crude processing facility at Abqaiq sidelined a total of 5.7 million barrels per day (BPD) of oil production.
This is the largest oil disruption ever. It sidelined the equivalent of the entire shale oil boom; more than the equivalent of all the world's spare oil production capacity.
But within 24 hours, this mother of all oil infrastructure attacks wasn't even trending on Twitter.
To me this means most people do not appreciate the seriousness of this situation. In fact, I have had people tell me that we are no longer as dependent on Saudi's oil, therefore this shouldn't impact us much in the U.S.
Such sentiments are understandable, but they aren't realistic. It is true that we import a lot less oil from Saudi Arabia. At the beginning of the shale oil boom, we imported about 1.5 million BPD from Saudi Arabia. In 2018, we imported 900,000 BPD from the Kingdom, which represented just under 10 percent of our crude oil imports.
But the oil markets are global, and Saudi is the world's most important oil exporter. They have long been a stabilizing influence within OPEC, ensuring that the global oil markets are well-supplied. The Saudi oil industry has enjoyed an air of invulnerability with respect to its oil industry. This sort of attack wasn't supposed to be possible. Related: US Shale Kept Oil Prices From Surging After Attacks On Saudi Oil
That air of invulnerability was shattered as a result of these attacks. This isn't a disruption of a few hundred thousand barrels a day in some war-torn country. This is millions of barrels per day from one of the most important and stable oil producers in the world.
As Reuters recently pointed out, the physical impact won't be felt for a few weeks. For now, crude oil inventories will be drawn down. Oil importers will scramble to secure supplies. Prices were certain to jump, and indeed they did. In the first session following the attacks, crude oil prices registered the largest intra-day jump in history.
But Saudi promised to quickly restore the lost production, and that has seemed to pacify the oil markets.
This incident will certainly remind us of the vulnerability of global oil supplies. It should reintroduce a fear premium back into the oil market. The ultimate impact on the price of oil will be determined by how quickly Saudi can return production to normal. If such a significant outage like this was extended, it's not out of the question that oil prices would make another run at $100 a barrel. But if Saudi gets production back quickly, the market will probably quickly forget about this until the next incident. We just don't have any historical experience to draw on, because the world has never seen an outage this large.
Oil producers that can will raise production. U.S. producers will especially benefit from this sudden global interruption. Shares of many U.S. oil companies are trading up double-digits, as they suddenly face the prospects for much better oil prices.
But make no mistake. Even though most people don't pay much attention to geopolitical events, when it comes to the oil markets, this is a really big deal. It may have enormous implications for the future, as it may just be the beginning of a serious escalation involving the Middle East's most important oil producer.
By Robert Rapier
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Comments
I agree with the sentiment of your article regarding the significance of the attack.
Have you considered that the magnitude or severity of the attack could be exaggerated?
The first is that they demonstrated the vulnerability of Saudi oil infrastructure to attacks.
The second is that they disrupted 5.7 million barrels a day (mbd) or 57% of Saudi oil production. This is the largest oil disruption since the Iranian Revolution disrupted the entire Iranian oil production amounting to 5.6 mbd then.
The third reason is that the attacks also exposed gaps in Saudi air defences despite the billions of dollars spent on buying top of the range American weaponry including the Patriot anti-missile system and the upgrading of Saudi air defences just a few weeks ago.
The fourth reason is that the Iran’s allies (the Houthis of Yemen) have demonstrated their ability and reach with their attacks. The Saudi war on Yemen is unwinnable. The sooner the Saudis understand this the safer their oil installations would be. Next time, the Houthis could target the Ras Tannura oil-loading terminal on the Gulf, the world’s largest. A successful strike against Ras Tannura could cripple the entire Saudi oil exports and precipitate a global oil crisis with prices rising towards $140 a barrel. The Houthis could also target again Saudi oil tankers passing through the Bab el-Mandib Strait.
The fifth reason is that Saudi Arabia should disengage from the US/Iran conflict and reach an accommodation with Iran. Joining the US-Israel axis will be to its detriment economically, strategically and financially.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London