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Simon Watkins

Simon Watkins

Simon Watkins is a former senior FX trader and salesman, financial journalist, and best-selling author. He was Head of Forex Institutional Sales and Trading for…

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Saudi Arabia Must Prepare For More Attacks On Its Oil Industry

Middle East

As highlighted in OilPrice.com just after the last major attack on Saudi Arabian oil facilities on 14 September 2019, there are many positive aspects from Iran’s perspective in pursuing such a strategy. If it had not been for Iran’s uncertainty about how former U.S. President Donald Trump might have reacted in the run-up to presidential elections in 2020 then there might well have been more such attacks before those most recently launched on 4 and 7 March. “Although major direct action against Iran by the U.S. [for the 14 September attacks on Saudi Arabia was not taken at the time – with planned strikes against Iranian targets vetoed in the Oval Office due to Trump’s concern about the possible number of civilian casualties – Iran did pay the price later with the [3 January 2020] assassination of [Major General] Qasem Soleimani who was the mastermind behind Iran’s foreign military and clandestine operations,” a source who has worked closely with Iran’s government told OilPrice.com last week. “With Trump gone, this strategy of directly attacking Saudi Arabia was always going to be used again and after [President Joe] Biden authorised U.S. attacks on Iranian assets in Syria a few days before, Tehran thought the timing was right for these new attacks,” he added.

The U.S. attacks on 26 February involved air strikes along the border between the Syrian city of Boukamal and the Iraqi town of Qaim against a number of Iranian-backed militant groups in eastern Syria that operate within the mostly Iraqi Shia Popular Mobilisation Forces (PMF)  paramilitary organisation. According to on-the-ground reports from the attack scene, the U.S. air strikes resulted in at least 22 deaths, principally among the PMF-aligned Kata’ib Hezbollah and Kata’ib Sayyid al-Shuhada groups that are allied with Syria’s Iranian-backed government in Damascus. In short, the U.S. hit Iranian military proxy units operating abroad rather than Iran directly itself. The U.S.’s air strikes against Iranian proxies in Syria, though, was itself retaliation for three rockets being fired just days before at the Green Zone in Baghdad with the apparent intention to destroy the U.S. Embassy there. Only a few days prior to this, another pro-Iran militia - Saraya Awliya al-Dam – fired a barrage of 107mm rockets at a range of targets near a U.S. military base in Erbil, the capital of Iraq’s semi-autonomous region of Kurdistan, killing one civilian contractor and injuring nine others. In short, Iran hit U.S. military and related proxy targets operating abroad. Given the U.S. response to these attacks, Iran evidently decided to up the ante and hit the only one of the U.S.’s two key allies in the Middle East that does not have its own nuclear weapons – that is, Saudi Arabia (and not Israel) – and the only one for which an effective attack against its oil fields and infrastructure would directly benefit Tehran.

Related Video: Can Saudis Defend Aramco from Houthis?

The most obvious and immediate benefit for major oil producer Iran of a successful attack against Saudi oil facilities is that oil prices rise, with the size of the increase and its duration dependent on how much damage is done to Saudi oil infrastructure in any such attack. The added advantage for Iran after the attacks on 14 September 2019 is that given the nonsensical comments from senior Saudis about how much damage had been done to the Kingdom’s oil infrastructure during those attacks and how long it would take to repair, seasoned oil traders now know that they should not believe a word that the Saudis say regarding such matters. Therefore, whether Iranian attacks succeed or not, the price benefit is greater than perhaps the damage done may warrant. Specifically, the 14 September 2019 aerial attacks on Saudi Arabia’s massive Abqaiq oil processing facility and Khurais oil field launched by Iran-backed Yemeni Houthi forces caused the temporary suspension of 5.7 million barrels per day (bpd) of Saudi oil output. This equates to well over half of the country’s actual crude oil production capacity, not the capacity figure that Saudi has plucked out of nowhere for geopolitical power purposes in recent years, and resulted in the biggest rise in oil prices in a single day ever.

However, Saudi Arabia’s then-new Oil Minister, Prince Abdulaziz bin Salman, stated just after the attacks that the Kingdom planned to restore its production capacity to 11 million bpd within two weeks. “It was extremely telling that he spoke of ‘capacity’ and later of ‘supply to the market’, as these are terms that Saudi tends to use in order to avoid talking about actual production, as capacity and supply are not the same thing at all as actual production at the wellheads,” Richard Bronze, cross-energy analyst for Energy Aspects, in London, exclusively told OilPrice.com at the time. “What Saudi was trying to do by not revealing the true picture was to protect its reputation as a reliable oil supplier, especially to its target clientele in Asia, so we have to take all of these comments with a hefty pinch of salt,” he added. “The Saudi statements [after the 14 September 2019 Iran-Houthi attacks] may not contain any direct falsehoods as such but nor are they entirely being fulsome with the truth,” he concluded. Related: Oil Bulls Beware: This Optimism Is Unjustified

The other major benefit to Iran of attacking Saudi Arabia via drones or missiles in particular is that it adds further strains to the already increasingly-strained relationship between the U.S. and Saudi Arabia. The foundation stones of this relationship were laid in 1945 with an agreement made between the then-U.S. President, Franklin D. Roosevelt, and the Saudi King at the time, Abdulaziz, on the Bitter Lake segment of the Suez Canal. The agreement was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud. For a long time, the Saudis believed that given continued oil supplies to the U.S. and the huge amount of defence procurement deals that it made with the U.S - and the regional political counterpoint to Iran that if offered the U.S. - nothing that Saudi did otherwise would affect this cornerstone relationship, including waging a full-scale oil price war against the U.S. shale oil sector between 2014 and 2016.

Saudi had misjudged the huge economic and geopolitical importance of the shale oil sector to the U.S., but it had still not fatally damaged the cornerstone 1945 relationship. Instead, after the 2014-2016 oil price war, this relationship deal changed to incorporate the U.S. expectation that Saudi Arabia would do nothing further to jeopardise the ability of the  U.S. shale industry to grow. A key part of this was not to engage in another oil price war that would cause the U.S. shale oil operators financial distress by overproducing to crash oil prices down through their breakeven points. On the other hand, the Saudis were also expected to ensure that production was not decreased to such levels that rising oil prices in turn pushed up gasoline prices in the U.S. up to levels that would damage the economy and also damage the chances of a sitting president being re-elected. If this meant that Saudi lost market share to U.S. shale producers by ensuring that oil traded between the US$40-75 Brent level then that was just the price that the House of Saud had to pay for the continued protection of the U.S. - politically, economically, and militarily. 

When the Saudis launched yet another oil price war in 2020 aimed again at crippling the U.S. shale oil sector, the U.S. lost all faith in this cornerstone relationship with Saudi and determined to gradually reduce all dependence on it for anything except as a counterpoint to Iranian influence in the region. This underlying message should have been understood by Saudi Crown Prince Mohammed bin Salman when then-President Trump personally telephoned him on 2 April 2020 to tell him that unless OPEC started cutting oil production – effectively ending the oil price war - then he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the Kingdom. The U.S.’s desire – certainly under Trump – to eradicate even the residual dependence on Saudi as the prime regional power counterpoint to Iranian influence upon which Washington can rely is evidenced in the push to replace Saudi with a broad coalition of Arab states that can instead act collectively as the counterpoint to Iran, which is seen in the recent spate of relationship normalisation deals between the U.S.-Israel axis and the UAE and Bahrain, with more likely to follow. Iran knows all of this, and although it has taken it some time to re-organise the leadership of its Islamic Revolutionary Guards Corps and Al-Quds forces that focus on foreign and clandestine operations, it launched these aerial attacks on Saudi and why the oil market can expect more of the same periodically going forward.

By Simon Watkins for Oilprice.com


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  • Mamdouh Salameh on March 16 2021 said:
    Saudi oil infrastructure and assets have become hostages to Iran’s allies in Yemen, the Houthis. This vulnerability will continue as long the Saudi War in Yemen goes on. Moreover, the attacks demonstrate the futility of Saudi dependence on the United States for protection.

    A more successful attack next time on the Ras Tannura oil-loading terminal on the Gulf, the world’s largest, could cripple the entire Saudi oil exports, inflict untold financial damage on the Saudi economy and precipitate a global oil crisis.

    The only way Saudi Arabia could ensure the safety of its oil infrastructure is to end its unwinnable war in Yemen and reach some sort of a rapprochement with Iran.

    And whilst both Iran and Saudi Arabia benefit from the rise of oil prices resulting from such geopolitical events, Iran’s motivation is far more ambitious than that. Its aim is to drive a huge wedge between the United States and Saudi Arabia and force the Saudis to disentangle themselves from US designs and build bridges of trust with Iran.

    Iran’s grand strategy is to be the regional power par excellence in the Gulf region as a nuclear power. It had exercised that role under the Shah with support from the Nixon administration. Its position will be underpinned by the fact that it virtually controls the Strait of Hormuz despite US naval presence in the vicinity of the Strait.

    Another pillar of Iran’s strategy is to eject US military presence from Iraq, Syria and the whole Gulf region thus achieving a spectacular geopolitical victory over the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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