Oil takes centre stage in global geopolitics after attacks on Aramco installations

With booming shale oil production in the United States, higher oil prices could be a boon for the US economy’s fastest-growing sectors.
Saturday 21/09/2019
Vulnerable assets. Smoke is seen following a fire at Aramco facility in the eastern city of Abqaiq, September 14. (Reuters)
Vulnerable assets. Smoke is seen following a fire at Aramco facility in the eastern city of Abqaiq, September 14. (Reuters)

DUBAI - Attacks on the Abqaiq processing plant and Khurais oil field in Saudi Arabia marked the most dramatic week for oil price increases in almost 50 years. The attacks halved Saudi Arabia’s daily oil production and shut 5.7 million barrels per day — around 5% of global oil output.

Oil trading witnessed the steepest price fluctuation in history for oil, skyrocketing almost 15% in response to the attacks before steadying.

Despite the complex and dangerous scenario of multiple burning fires in the biggest of their kind oil and gas facilities in the world, Saudi workers were able to douse the flames in less than seven hours.

With assessments of the damage at Abqaiq and Khurais complete — described as considerably “less significant” than initially feared — Saudi Aramco quickly mobilised to begin repair work, which is expected to last a few weeks rather than months as some had speculated.

Despite the disruption to its production capacity, Saudi Arabia, keen to keep supply of oil to the international market unhindered, dipped into its reserve stockpiles to ensure customers were able to continue loading Saudi oil.

However, these unprecedented attacks are the latest in a series of developments to argue that oil has taken centre stage again in global geopolitics.

Houthi rebels, after pledging allegiance to Iranian Supreme Leader Ayatollah Khamenei, claimed responsibility for the attacks but it is Iran that has been charged unequivocally by the United States with responsibility for this “act of war,” in US Secretary of State Mike Pompeo’s words.

Dismissing the Houthi claims, Washington maintained that the direction of attack was possibly from Iraq, where Iran’s Islamic Revolutionary Guard Corps is entrenched with Iran-allied Shia militias, but more likely from southern Iran itself.

The wreckage of more than two dozen cruise missiles and unmanned aerial vehicles used in the attacks shown by Riyadh appear to originate from Iran, analysts said.

While many details of the attack have not been released to the public, Tehran, which denies involvement in the attack, is thought to be behind the incident indirectly through its proxies.

Crippling US sanctions against Iran’s oil trade, which used to represent some 80% of its total exports and around 40% of government revenue, have brought its economy to a standstill. Iran, traditionally one of the world’s largest oil exporters, could be losing $3 billion in oil revenues every month because of destabilising regional activities that Washington is prepared to tolerate no longer.

Iran has promised a response to US pressure and the last few months have seen merchant shipping — especially oil tankers — being harassed, seized and even attacked with limpet mines around the Arab Gulf.

Even in the scenario that Iranian proxies, rather than Iran, were behind the attacks, they appear to be linked to the fact that Saudi Arabia and OPEC have been playing an instrumental role in keeping oil prices stable and covering shortfalls could have been caused by the US-Iran sanctions and standoff.

US President Donald Trump has attached importance to and repeatedly called for lower oil prices since he took office as he aims to take the US economy out of its dragging slow-growth mode.

Attacks on Saudi oil infrastructure introduce new risks into the global supply chain so prices are bound to rise and will almost certainly become more volatile.

High prices and price volatility in oil trade are undesirable for the United States but Washington today has a larger buffer of protection than, say, the economies of China, Japan and India, which are heavily dependent on oil from the Middle East. In fact, with booming shale oil production in the United States, higher oil prices could be a boon for the American economy’s fastest-growing sectors.

The International Energy Agency said the United States had briefly overtaken Saudi Arabia as the world’s largest oil exporter at one point in June. With Saudi production temporarily knocked back, the United States may well regain the top spot again.

It is in this backdrop that the Trump administration suggested its willingness to release oil to the international market from its strategic petroleum reserve if necessary.

The redrawing of the global energy markets as a result of shale oil is significant. The United States is not only taking a larger global market share and billions of dollars in revenue from it but also becoming gradually less dependent on oil from the Middle East, a region hitherto seen as vital to American economic interests.

This is a trend that could accelerate if the rise in international oil prices sustains because shale drillers in the United States could increase output for exports 10-15% next year.

On the other hand, China, already in the midst of a trade war with the United States and with slowing economic growth, lies far more exposed to energy supply risks from the Middle East. One-fifth of China’s oil imports are from Saudi Arabia and reports say it recently committed hundreds of billions of dollars over the next two decades to modernise Iranian infrastructure, including its oil and gas industries.

It is estimated that, for each dollar increase in the price of a barrel, the cost to China rises more than $1 billion.

China could well be realising the need to assume a more proactive role in the region but, for now, it will be exploring its options and any leverage it has to ensure restraint from the Saudis as Riyadh and its allies look to build a collective response to the attacks.

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