Editor’s Note: Varsha Koduvayur is a senior research analyst at the Foundation for Defense of Democracies, where she focuses on the Gulf. The opinions expressed in this commentary are her own.
Saturday’s attack on Saudi oil facilities took 5.7 million barrels per day of production offline and pushed oil prices 18% higher. President Trump said the United States is “locked and loaded” for potential retaliation. In response, Iran’s foreign minister threatened “all-out-war” if the United States or Saudi Arabia strikes.
Despite all this turmoil in the marketplace, the economic impact of the attack may not be so drastic over the coming months.
The market’s short-term price hike is understandable given that Saudi Arabia lost nearly half of its daily output. But this attack alone is unlikely to push oil prices sky-high. Saudi Aramco, a sophisticated company (and the world’s most profitable company, to boot) has redundancy built into its operations. It may take “weeks, not days” to restore the lost capacity, as Saudi sources have noted, but Aramco has the capability to plug short-term gaps by pulling from its reserves. Prince Abdulaziz bin Salman, the kingdom’s newly installed energy minister, said Saudi Arabia was aiming to bring supply to 11 million barrels per day by the end of the month. Even prior to the minister’s remarks, oil had already begun edging downwards.
More broadly, regardless of Saturday’s attack, the oil market remains oversupplied relative to demand, thanks to the rise of US shale production and cooling global demand over the US trade war with China.
In July, OPEC and non-OPEC members renewed a pact to cut production by 1.2 million barrels per day in a bid to limit supply and thereby boost flagging oil prices, set to last until March 2020. Yet this production cut may be offset by the prospect of the global economy dipping into a recession next year, which could further dampen demand.
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Saudi Arabia’s messaging in the wake of Saturday’s attack reflects the kingdom’s understanding that there is too much supply in the marketplace, not too little. If other producers were to pump more, it could come at the cost of Saudi Arabia’s market share, which the kingdom is keen to preserve.
All these dynamics should give consumers relief: The impact of oil’s rally on prices at the pump will probably be minimal, and any uptick in price will be spread out over a period of time. Plus, President Trump’s decision to authorize using the Strategic Petroleum Reserve will help cushion the domestic impact of the oil price rally.
For the global economy, the real risk is not the attack itself, but rather the potential for Iran to assault vital energy infrastructure. US and Saudi investigators are increasingly confident that Saturday’s attacks originated from launch sites in Iran, though Iran continues to deny any involvement. It’s likely that Iran wants to retaliate against the United States for sanctions that have battered its economy and tanked its oil exports. And, it likely wants European and Gulf allies to relent on their support for the Unites States’ “maximum pressure” campaign against Iran.
The current confrontation began with attacks on tankers in the Gulf of Oman. President Trump has blamed Iran for those attacks even though Iran has denied any involvement. If Iran is found to be behind the Saudi oil attacks, then it would be a marked escalation in the Islamic Republic’s cold war with Saudi Arabia and signal the Iranian regime’s appetite for provocation.
The Iranian regime is playing a dangerous game of chicken with both the United States and the US-aligned Arab Gulf states. If Iran repeatedly attacks other nations’ energy infrastructure, it could prove devastating to the global economy and cause serious pain at the pump. After all, this is likely what Iran wants: a US recession and higher gas prices that have the potential to derail President Trump’s chances of victory as he heads into a heated election year. The regime likely hopes that the possibility of a loss next November can spur President Trump into giving the regime concessions, such as the proposed $15 billion line of credit.
Yet if Iran shows no restraint, Trump may decide the time has finally come to hit back hard against Iran. The consequences for energy markets would be extremely difficult to forecast, yet likely destabilizing. The immediate priority for the United States and its Gulf allies, however, should be to better secure energy facilities and supply routes. Should these attacks continue, they may no longer produce such muted results.