Oil shock, wider war after Saudi refinery attack?
Trump now says it is increasingly "looking like" Iran was behind the attack on Saudi Arabian oil facilities over the weekend, while adding: "I don't want war with anybody but we're prepared." (RFE/RL) He also tweeted in typically ugrammatical style: "Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!" Meanwhile, Yemen's Houthi rebels have claimed responsibility for the attack, while Iran is denying any involvement. How are we to read this, and what are the risks?
Two oil facilities were hit in the multiple drone strikes—the Buqaiq processing plant and the Khurais field, both in the country's Eastern Province. The Houthis have indeed been launching increasingly audacious attacks on Saud Arabia. Last month, the Houthis claimed another drone operation against the Shaybah oil field, near the border with the United Arab Emirates, more than 1,000 miles away from Yemeni territory. (LWJ)
The strikes have disrupted production of 5 million barrels per day—about half of the kingdom's oil capacity, and some 5% of the daily global supply. The international price for Brent crude jumped nearly 20% on Sept. 16, in the wake of the attack. Energy industry rating agency S&P Global Platts is saying the attack will raise the "risk premium" in the global crude market. "The sudden change in geopolitical risk warrants not only an elimination of the $5-10 a barrel discount on bearish sentiment, but adds a potential $5-10 a barrel premium to account for now-undeniably high Middle Eastern dangers to supply and the sudden elimination of spare capacity," the agency said. "As such prices are likely to break out of the current $55-65 a barrel options range, to test the high $70s as currently supported by fundamentals." (Reuters, CNN, CNBC)
So, the popular conventional wisdom (avidly promoted by the industry) notwithstanding, the Middle East remains strategic and even determinant where the global price is concerned. Oil prices are still chiefly determined by politics—not geology or production levels or even market demand. The fact that the US is now an oil exporter and is no longer massively dependant on Saudi imports does not change this. The Saudi and Persian Gulf reserves are still critical in terms of determining regional and global power, and the prospect of a military contest for their control will be reflected in what you pay at the pump.
How realistic is this fear?
Even if Iran supplied the Houthis with the drones, or the technology to build them, that does not necessarily mean they were intended by Tehran for an attack of this magnitude. Furthermore, with the systems of total global surveillance maintained by the Pentagon and National Security Agency, it is hard to believe there is really much ambiguity about where the attack was launched from. So, yes, the rush to blame Iran smacks of war propaganda.
Jean-Francois Seznec, senior fellow in the Atlantic Council's Global Energy Center, writes:
The question is not whether the Saudis will retaliate but when, how, and with how much support from the United States. Furthermore, the Russians will be great beneficiaries as they will earn much more per barrel on their oil and gas exports. Of course, the United States, now the largest exporter in the world, will also benefit greatly. Even, with a price that could easily double, the Saudi remaining exports will still earn amounts close to what they earned before. Only China, who imports most of its crude from the Gulf, will be financially hit at the tune of $1.1 billion for each dollar increase per barrel.
Thus, except for China, few of the players will seek to defuse the situation, all feeling that they have little to lose and much to gain. Hence, it would seem that the September 14 attack stands a strong chance of escalating into an all-out conflict.
But this is only one part of the story. Yes, as we argued as early as 2001, when oil prices were low and going down, the global petro-oligarchy ultimately seeks high prices to drive profits and expand production, and has consciously contrived to inflate them—including through war. Despite all the talk in recent years about how low oil prices are now permanent (mirrored, of course, in the similar talk 10 years ago about how high prices were now permanent), we have been predicting a new oil shock as threats to production mount in various hotspots around the world. We may shortly find ourselves all too vindicated in this prediction. And it may be effected through means almost too horrible to contemplate.
However, we have also noted a countervailing tendency to the pressures driving the US and Iran toward war. Washington and Tehran are essentially allied in Iraq—both backing the Baghdad regime against ISIS and Sunni militants. The alliance is more de facto in Syria, but also in place. We still see an element of political theater in all this. Or at least we hope we do.