Attacks on Saudi Arabia’s Oil Supply Rattle Global Markets

Oil-processing plant in Abqaiq, in eastern Saudi Arabia, damaged by drone strike on September 15, 2019

A series of drone and missile strikes on Saudi Arabia’s oil-processing facilities on September 15 has rattled global oil markets. Saudi Arabia, the largest global oil exporter, supplies about 10 percent of the world’s oil. The attacks hit oil-production plants at Khurais and Abqaiq, the largest such facility in the world. Both Saudi and U.S. officials blame Iran for carrying out the attacks, based on debris from the weapons used and the probable direction of the strikes. Iran’s allies in neighboring Yemen, the Houthi rebels, claimed responsibility, while Iran denied involvement. Investigations are ongoing, including analysis of GPS-guidance hardware in the wreckage. There has been no military response yet.

Historically, there have been several major disruptions to global oil markets, most of which originated in the Middle East: the Arab Oil Embargo in 1973, the Iranian Revolution in 1979, the invasion of Kuwait by Iraq in 1990, among others. The current situation ranks among the worst, in terms of the amount of oil taken off the market. An estimated 5.7 million barrels per day of crude oil were cut off, temporarily—about half of Saudi Arabia’s production. The price of a barrel of crude oil rose initially by 14.6 percent—the largest one-day spike in 30 years.

The economic impact on the global oil supply and its security is significant. The effect of a supply shortage on increased prices is a classic display of the law of supply and demand. With Saudi Arabia’s supply interrupted—and facing ongoing threats—other sources will have to fill the gap. But according to the Strauss Center, “There are more producers than ever contributing to a single global pool of oil from which consumers then draw.” This means the current disruption may prove to be less negative than feared. In the United States, the Trump administration’s announcement that it is ready to tap the Strategic Petroleum Reserve (SPR) helped to dampen concerns of an oil shortage. The SPR consists of storage tanks and underground caverns that hold some 630 million barrels of crude oil. The United States maintains, but has rarely used, the SPR as a stabilizing mechanism for critical situations.

Image credit: © FAYEZ NURELDINE/AFP/Getty Images

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