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The Saudi Oil Crisis

Last updated on November 3, 2019

By John Kerr

Saudi Col. Turki al-Malki on Sept. 18, 2019, points to missiles allegedly used in the attack against his nation’s oil facilities on Sept. 14, 2019(epa-EFE)

The weekend of September 14th saw a daring attack on the Abqaiq oil refinery. The oil refinery is located in the Khurais oil field in Saudi Arabia, and this attack led to a 15% surge in oil prices. The attack was orchestrated by a Yemen terrorist group known as Houthi. Several drones were launched against the refinery, crippling its production. As these rebels are backed by the Iranian government, the United States was quick to blame Iran for the event.

The daily supply of crude oil was cut by a whopping 6-7%, sparking political tension between the producers and large consumers of the oil. This attack comes during a period of economic struggle all over the globe, and its timing has conflicted with the deteriorating trade relations between America and China. Germany is also facing an economic recession, and the deals between the United Kingdom and the European Union have reached unforeseen tension in the British Parliament. The economics and politics of the attack have caused ripples across the globe, as the supply of the most widely used fossil fuel in the world was cut significantly.

Economic Implications

Before the attack on the Abqaiq oil refinery, crude prices settled at $60/bbl when the market closed on the 13th. After the attack, these prices surged to $69/bbl, a 15% increase on September 16th, the first day the market opened since the attack. As of September 22nd, crude was trading at $65/bbl. While this is a significant increase, it does not exceed the safe zone of $50-$75/bbl declared by the Union Bank of Switzerland. If the price per barrel remains in this range, supply and demand for oil will be balanced in a rough equilibrium. However, in the days following the attack, two of the world’s largest importers, India and Turkey, took about a 0.75% hit to their GDP, as both countries import 80% and 85% of their oil, respectively. Both countries added to their deficits, and India’s rupee trading price fell.

On the other side of these implications, other large producers of oil were able to gain back and even add to their GDP. Kazakhstan and Russia were the two biggest winners from this event. Kazakhstan saw a 2.55% increase in its GDP due to the attack and Russia experienced a 1.8% rise.

Did you know?

Saudi Arabia sits on around 18% of the world’s petroleum reserves. The oil and gas sector accounts for about half of the Saudi GDP and about 70% of export earnings.

Political Implications

Before the dust had even cleared on the attack, the press jumped all over the story, which began to spread mass panic all over the oil-reliant globe. The attack sparked an almost immediate response from Washington, namely President Trump, blaming Iran for the attack. This was because the Iranian government was known to supply the Houthi rebels with weapons and supplies, and Trump believed it was this group which planned and executed the drone strike. Tensions are rising and the Yemen Crisis is still raging. This Civil War in Yemen, which forced the former authoritarian leader out of office, has seen the attempted intervention by Saudi Arabia and has led to airstrikes against the 2nd poorest of the Middle Eastern countries. 

Retaliations from the Houthi rebels has ultimately led to this attack on the Abqaiq oil refinery. Since the American accusations against the Iranian government, the United Nations have agreed that the attacks are the work of Iran’s support of the Houthi rebels. The Persian Gulf has seen the undercurrents of war for the past few months and many fear that with Tehran’s recent attacks on oil tankers and the interception and destruction of a U.S. surveillance drone by Iranian missiles, the powder keg in the Middle East may soon ignite.

“Iran has now launched an unprecedented attack on the world’s energy supply. There is no evidence the attacks came from Yemen. We call on all nations to publicly and unequivocally condemn Iran’s attacks.”

US Secretary of State Michael Pompeo

The Abqaiq oil refinery issued a statement soon after the attack that it should be able to return to producing at only around 33% or ⅓ its previous production levels. After initial repairs to the facility, an expected 2 million barrels per day are going to be pumped out before a more extensive rebuild is started.

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