• Strike on Saudi Arabian Oil Facilities? Bad, but Maybe Not Catastrophic

    Surge Summary: An attack on a Saudi Oil facility will effect oil prices but it may not be the catastrophe some would assume because the economy and oil markets have changed in important way since the 1970s. 

    News of a hold in oil productions usually causes the sphincters of sentient observers to clench up like a fist. Especially if they’re commuters. Yikes! What is this going to go to gas prices at the pump?!?!

    And no doubt the cost of filling up your tank will be effected …

    But perhaps not as much as you might assume?

    Here’s the backstory (Eliza Carter/Morning Brew)

    On Saturday, 10 drones struck the world’s biggest crude oil processing facility in Saudi Arabia. The attack slashed the output of state-owned oil giant Saudi Aramco by half and sent oil futures skyrocketing 13%.

    It’s at least the sixth time in four months a Saudi energy facility or tanker has been targeted. Houthi rebels in Yemen took responsibility for this weekend’s attack, but U.S. Secretary of State Michael Pompeo blamed the Iranian state.

    5.7 million barrels/day of output were interrupted — the worst sudden supply disruption ever. It’s a bigger halt than even nightmarish losses of 1979’s Islamic Revolution and those which occurred in 1990 when Saddam Hussein invaded Kuwaiti and broke off Iraq’s petroleum supply.

    If the first instinct among analysts and oil-users is “Disaster!”? That’s understandable.

    But that might not be how this situation winds up.

    True enough:

    Saudi Arabia is OPEC’s biggest producer, and the global economy isn’t exactly in a place where it’s ready to absorb a jump in oil prices. Economists expect energy-importing countries like China and Japan, the world’s second- and third-largest economies, to bear the brunt of higher prices.

    The Wall Street Journal offers some important details:

    [T]he U.S. economy has matured since the 1970s, when a spike in oil prices sent the economy spiraling.

    • Energy only makes up about 2.5% of household consumption, compared to about 8% in the 1970s.

    • And new energy techniques like fracking jumpstarted U.S. production, nudging it ahead of Saudi Arabia as the top global producer and better insulating it from price increases.

    The situation does highlight some post-1970’s oil risks: Unmanned vehicles (i.e., drones) pose a threat in 2019 that didn’t exist in the days of Presidents Nixon, Ford, Carter and Reagan. Cyber-attacks obviously are also a greater threat today to energy output than ever. In 2012, the Saudi Arabia’s Aramco suffered one, although output was not disrupted.

    Good news is Saudi officials said by today’s end they expect about one-third of the lost output to be restored.

    President Trump also tweeted that, if necessary, he will authorize the U.S. Strategic Petroleum Reserve to release oil in order to steady the markets – which seems a rather hasty response, but could calm some fears, nonetheless.

    Economic conditions, like most of life, are a moving thing; they change for better, for worse, they can be unpredictable. Some economic and technological changes which have transpired over the past fifty years might mean this current, troubling situation in Saudi Arabia won’t rock the world like it would have back then.

    H/T: Eliza Carter/Morning Brew

    Image: Screen Shot: Fox News; https://www.msn.com/en-us/weather/topstories/drone-strikes-set-saudi-arabia-oil-facilities-on-fire/vi-AAHil7m

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