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Q&A Energy Markets

Energy and Geopolitical Impacts of the Saudi Oil Attacks

An attack on the world’s largest oil processing plant last weekend knocked out half of Saudi Arabia’s oil production. The disruption initially sent crude oil prices up nearly 15 percent, the biggest jump in over three decades, as the market scrambled for assessments of the damage. Houthi rebels in Yemen claimed responsibility, but Saudi Arabia said the facilities were hit with Iranian weapons. Jason BordoffAntoine Halff, and Richard Nephew, scholars from Columbia University’s Center on Global Energy Policy, offer the following insights on the attacks and their potential impacts on energy markets, geopolitics, and energy security.

Founding Director, Center on Global Energy Policy Columbia University School of International and Public Affairs
Q. The US is now one of the largest oil producers in the world. Does that mean the attack on Saudi Arabian oil installations will not cause prices at the pump to rise in the United States?
A. No, US consumers are not immune to the oil price impact of the attack on Saudi oil installations. What has happened in the United States is remarkable. A decade ago, the US imported 60 percent of its oil. As a result of the shale oil boom, the US will be a net exporter of oil annually by next year. But even though the United States may be oil independent, on a net basis, it still imports a vast amount of oil even as it exports oil and petroleum products. The US imports nearly 1 million barrels per day from Saudi Arabia. In addition, oil is priced in a global market and prices in the US move with the world price. US gasoline prices reflect world oil prices. The jump in world oil prices and wholesale gasoline prices after the attack will translate into higher gasoline prices for US motorists.

Q. Is the Strategic Petroleum Reserve designed to handle supply disruptions of this magnitude? Is it ready to handle an emergency release “if needed”?
A. As a member of the International Energy Agency, a byproduct of the 1970s oil crisis, the US is required to hold stocks of crude oil or petroleum products equivalent to 90 days of net imports for use in emergency situations—either in private inventories or directly by the government.
By statute, the president can order a full drawdown of the SPR to counter a “severe energy supply interruption,” or a more limited drawdown if the president finds there is “a domestic or international energy supply shortage of significant scope or duration.”
A short-term, significant disruption in global oil supply is very much the type of supply emergency that the SPR was designed to mitigate, working in cooperation with our IEA partners.
The SPR’s outdated infrastructure needs to be modernized to ensure it can remain effective in the event of an emergency. The SPR is supposed to be able to release 4.4 million barrels per day, although aging infrastructure combined with changes in the US energy system have raised questions about whether it could actually do that.
Q. What do you make of the president’s announcement that he’s going to expedite pipeline permits to help manage the supply disruption?
A. The rapid growth in US oil production has created infrastructure bottlenecks that the market is in the course of remedying. New pipeline projects are controversial and attract significant opposition from environmental advocates and even some state and local governments. As oil production grows, so does natural gas supply. Indeed, much of the growth in US natural gas production has been in the form of associated gas—gas that is produced as a byproduct of oil—which has resulted in an increase in flaring, especially in the Permian basin. Flaring is harmful to the economy and the environment. Regulators already limit flaring, and need to take even stronger steps in that regard. If flaring is to be limited, that will require more natural gas infrastructure.
The president’s claim that expediting pipeline approvals will somehow mitigate the impact of a disruption in global oil supply is misguided. Pipeline capacity is already being built rapidly. While expediting permitting may marginally accelerate that growth, any cumulative impacts in US oil production would be modest. Moreover, pipelines cannot be built quickly enough to affect current US oil production levels. In the future, even if oil production were marginally higher because of expanded pipeline capacity, the ability to mitigate global supply disruptions comes not from how large total US oil output is, but from the ability to rapidly bring additional oil supplies to the market to offset disruptions. Saudi Arabia is the only country in the world that holds meaningful levels of such spare capacity. Shale is short-cycle supply, but still takes 9-12 months to respond to price changes—not weeks.
Q. You’ve said Saudi Arabia is focused on bringing prices up. How does this attack impact Aramco’s prospects for an IPO?
A. My guess is that Saudi Aramco will continue to be attractive to investors in spite of this incident. It invests heavily in security, whether from cyber or physical attacks. Nonetheless, this attack reveals a new type of asymmetric regional threat that can cause severe damage to the Saudi oil industry. Saudi Aramco will need to demonstrate to investors how it is taking steps to improve the security of its physical infrastructure from more sophisticated attacks, including this type of airborne attack, just as it did following a cyberattack several years ago.
Senior Research Scholar, Center on Global Energy Policy, Columbia University School of International and Public Affairs
Q. What is the impact of the disruption on oil markets? How do supply and demand fundamentals look at the moment?
A. The headline disruption in the immediate aftermath of the attack couldn’t have been more spectacular.  The oil markets were closed for the weekend at the time of the strikes, and traders had a couple of days to digest the news. When they reopened on Monday, prices predictably took off. The price jump was the steepest in history. Beyond the kneejerk response, however, the real impact will obviously depend on how long the outage lasts, how quickly Aramco can bring the damaged units back online or boost production from other units to make up the difference, and obviously on whether the attack leads to any armed retaliation and further escalation.
For all its steepness, the immediate price response has arguably been relatively subdued compared to the scope of the disruption. The initial supply cut, 5.7 million barrels per day, was the largest oil supply disruption on record—bigger even than what we saw during the Gulf War. It helped that Saudi domestic crude inventories—“in-Kingdom”—were quite comfortable at the time of the incident, allowing for relatively smaller export cuts than the wellhead loss would suggest. Satellite data show destocking of nearly 10 million barrels by Sept. 16 compared to pre-attack levels. President Trump’s trigger-happy tweet that he had authorized a release of strategic stocks “if needed” did its part to douse the rally. And on Sept. 17, the new Saudi Oil Minister, Prince Abdulaziz bin Salman, and Amin Nasser, CEO of Saudi State oil company Aramco, held a press conference in Jeddah to announce that half the lost production had already been restored and the rest would soon follow suit. Prices retraced much of their gains. By Sept. 18, Brent front-month futures were back down to $63.5 per barrel, just $3.3/barrel above their closing level the Friday before the attacks. At the back of the curve, December 2021 futures were less than $1/barrel above Friday closing prices. The market seems to be taking Prince Abdulaziz at his word, and, rightly or wrongly, does not seem to be pricing in the risk of military escalation.
Whether Aramco will be able to deliver on the repairs and tensions in the Gulf de-escalate remains to be seen. If not, the market is in for a rough ride. Even at the production rate indicated by Prince Abdulaziz on Tuesday, with a supply loss limited to about 2.85 million barrels per day, there just isn’t enough spare capacity out there to make up for the shortfall. Most of the world’s thin spare capacity is concentrated in Saudi Arabia itself, which wouldn’t do much good if the facilities needed to process it are disabled.
Q. Isn’t there too much oil in the market? Could that be part of the reason why the price response, after the initial spike, has been relatively subdued? Does that mean that from an oil-market perspective, the attacks come with a silver lining?
A. It is true that the strikes occurred in a relatively bearish market environment and that the initial price increases would probably have been even steeper, and would have stuck for longer, if oil demand growth had been more robust or shale production had not been so high.
Saudi Arabia’s frustration with the prevalent price softness before the attacks has been widely reported. Observers have noted that Riyadh had been needing higher prices to support its revived plans to float part of Aramco. There has been speculation that frustration with persistently subdued price levels was one of the reasons behind the surprise ousting of former Oil Minister and Aramco Chairman Khalid Al-Falih shortly before the attacks. While Riyadh may have been somewhat desperate to boost oil prices, this was certainly not the way it had hoped to go about it. Indeed, the government is reportedly considering delaying once again the Aramco IPO because of the attacks.
As always, the market impact of an outage depends not only on the scope of the disruption itself but also on the broader market context. Signs of economic slowdown, sluggish end-user oil demand, and a perception of supply abundance may all have helped the market better absorb the news of the attacks—so far.  The picture is not all one-sided, however. On the one hand, end-user oil demand has been hurt by the US-China trade war and worries about the global economy. The International Energy Agency has been slashing its short-term oil demand outlook for several months and had just been warning OPEC on a looming supply glut when the attackers struck. The agency has also recently reported counter-seasonal distillate product inventory builds across most if not all key regions. The weakness seen in oil-product fundamentals is not replicated in crude markets. For all this bearishness, crude markets have actually given signs of strength lately, with precipitous drops in global crude oil inventories since late May under the joint effect of the Iran sanctions and OPEC+ production cuts (and the collapse in Venezuelan production). Excluding floating Iranian inventories, and despite the weakness in end-user demand, the crude market is much less comfortable than just a few months ago. 
Against this backdrop, if there is a retaliatory response and further escalation, then obviously all bets are off and much higher prices are to be expected.
Q. How does the attack change the global view on the security of oil supplies from Saudi Arabia?
A. The attacks managed to cripple—at least temporarily—two facilities at the heart of Saudi Arabia’s oil infrastructure and, for that matter, the oil market itself: Abqaiq, the world’s largest crude processing facility, and Khurais, Saudi Arabia’s second-largest oilfield. These attacks and their aftermath question prevailing perceptions of energy security and show cracks in the twin pillars of global oil security architecture: the principle of consumer coordination in the face of disruptions through the IEA and the image of Saudi Arabia as a large, stable, and reliable global oil supplier. Both pillars are showing signs of stress.
Until Sept. 14, the prospect of a strike from Iran on a vital Saudi facility like Abqaiq would have seemed strategically suicidal and practically impossible. For Iran, the retaliation risk would have been too powerful a deterrent. And there was a perception that an attack would have been impossible to pull off in practice. A brazen terrorist ground attack on Abqaiq in 2006 was easily repelled. Saudi facilities appeared heavily protected against ground and air attacks, thanks in part to big-ticket arms purchases from the United States. All this has changed. The US policy of “maximum pressure” and renewed sanctions on Iran have removed its inhibitions—with its market access cut off it has much less to lose—and the attacks have exposed unsuspected gaps in the Kingdom’s defense systems. The implications are twofold:  Saudi oil facilities are far more exposed that we thought, and the security of the world’s top source of oil imports cannot be taken for granted. And war in the Gulf would carry huge risks for Saudi Arabia’s oil infrastructure and for the world economy, as there is no spare capacity anywhere that can replace Saudi barrels and strategic reserves are not a viable substitute. Even if Aramco quickly gets Abqaiq back up, the attacks are a watershed. This is the Saudi 9/11, with a before and an after.
Q. What does the US discussion of releasing its emergency oil stocks mean to the ability of consumer countries to react in a coordinated fashion to supply disruption?
A. The somewhat disjointed response of consumer countries is the other way in which the security architecture is coming under stress. After the attack, President Trump tweeted he had authorized a release of oil from the United States Strategic Petroleum Reserve “if needed.” Shortly before that, the IEA had issued a statement to the effect that no release was needed just yet as the market was “well supplied.” (Trump later walked back that commitment.) This dissonance might not seem like a big deal, but it is unprecedented: The US is the founder of the IEA and its top source of funds, and while there have been frictions in the past between previous heads of the IEA and Washington, I cannot think of a time when such dissonance has come out in the open this way. 
The tweet was obviously meant to calm the market. But its unilateralism in the face of a global disruption is something new. There is nothing US-specific about Abqaiq—unlike the kind of disruptions that can occur when a hurricane knocks down crude production or refining activity in the Gulf of Mexico. It is a global event, affecting the world’s largest crude processing facility in the world’s largest crude exporting country, with a worldwide reach. A coordinated approach under IEA auspices would have seemed the way to go to get the most out of a release. Trump’s go-it-alone approach is in character and has the merit of cutting through red tape but is clearly a key point of departure. The conditionality of his tweet (“if needed”) also struck a note of jarring uncertainty. US disengagement from multilateral associations and deals—from NATO to the COP21 to the Joint Comprehensive Plan of Action to the G7—had until now not reached the IEA. This now seems to have started to happen—a fact that only adds a further element of unpredictability to an already increasingly unpredictable market.
Senior Research Scholar, Center on Global Energy Policy, Columbia University School of International and Public Affairs

Q. If Iran was behind the attacks, why would they carry them out now? After National Security Adviser John Bolton left office, there was talk about an opportunity for direct negotiations between Iranian President Hassan Rouhani and Trump.
First and foremost, I think we need to step back, outside our US policy and politics bubble, and remember that there’s a big wide world out there that is not obsessed with the to-and-fro of US administration politics. The Iranians are not just simply waiting for the US to do things or for the internal administration situation to settle itself. They are proceeding along with policy decision they made, and they’re reacting to US policy decisions that remain on the books—not withstanding rhetoric to the contrary.

I think the Iranians had decided about four months or so ago, around the May 2019 decision of the Trump administration to push Iran’s oil exports to zero, that they were going to impose costs for that decision on the United States and US partners they feel were responsible for it. And that obviously involved targeting oil infrastructure for Saudi Arabia and the UAE, and creating strain on their markets—and I see this as just more of the same. In this case, the Iranians are imposing that cost by raising the price of oil by targeting Saudi infrastructure and by demonstrating they are not going to back down until they see real changes in the US policy toward Iran.

It’s also possible this is a factional thing in Iran: One party trying to undermine the Rouhani administration, or that this could be a demonstration that the Iranian government doesn’t have full control over what goes on with its proxies. But I don’t think that is as likely as a strategic decision to impose costs for US policy, and that’s what they’re going to continue to do until they see real changes in US policy direction and content.

Q. Will this result in US military action?
A. It’s certainly possible but seems unlikely in the short run. The president was pretty clear shortly after the attack that he was considering it and has subsequently said he’s considering everything up to and including “the ultimate,” presumably the use of nuclear weapons.

I don’t think we should assume a US military response is inevitable. And I certainly think President Trump is just posturing as he tends to with respect to nuclear weapons use. But I do think that one issue the US is talking about internally is the absence of a US military response thus far to various Iranian provocations, and whether or not that’s emboldening Iran. There will be people who say we need to deter future Iranian attacks and the only way to do that is through at least some show of force.

I also think that we are going to engage the UN first, as the Saudis have indicated they intend to. The United States asking the UN to act probably won’t result in much, given Russia’s disinclination to support US policy in this regard or to punish Iran. If that approach fails—as it will—that may encourage US policy makers to consider independent military action. 

Even if a military response takes place, that doesn’t necessarily mean we’re going to war; it doesn’t necessarily mean there are going to be widespread attacks. We’ve seen the president has avoided that in previous cases to the extent possible, like with Syrian chemical weapons. It could be something very minimal: It could involve targeting Iranian oil or gas production infrastructure, potentially on the coast. It could involve targeting just those missile sites or drone sites that were allegedly responsible for the attack, or Islamic Revolutionary Guard Corps installations. There’s a variety of things we could do.

It’s also worth noting that Congress is supposed to have some sort of interaction here too. There is no authorization to use military force that would permit us to attack Iran to respond to an attack on Saudi oil infrastructure. Unless there is a real threat to US forces that requires preemption, or some real threat to the United States that requires action now, arguably we need to see some kind of constitutional process—seeking permission from Congress to act.

Q. Is there any precedence of US military interventions in Iran that we can look back to for guidance about possible reactions?
I think the clearest example we have is the tanker wars of the late 1980s, when the US and partner countries were confronting Iranian attacks on oil infrastructure and decided to act, first to protect shipments and then to strike against Iranian oil infrastructure when it was decided that was necessary to push the Iranians back. There are definitely precedents here, but they involved considerable interaction with Congress, they involved more time, and they involved evaluation of intelligence, which is ongoing.

Q. Does this change the way we think about energy security going forward?
It doesn’t change my perception of US energy security, because I had anticipated, and believed for some time, that as part of a global market, we did not stand alone from what happens elsewhere in the world. Because our energy exports and imports are all linked to the international market, we’re affected by price changes, we’re affected by instability.

On top of that you’ve got the strategic dimension, where we have got international partnerships that are dependent on us standing up for the interests and rights of our partners. We’ve got partners that are directly at risk of disruption in their energy supply that could come from attacks of this nature. So, we were never as apart and independent as people talked about; we’re part of the global energy sector and industry and we don’t have the ability to just say we’re not there because we have shale oil in the United States. That’s a very naïve way of looking at how US energy security can function when we’re part of a global energy market and have the global interests we’ve got. 

Q. What kind of commitments does the US have to safeguard the region? There’s been talk that Asia should be taking over some of those responsibilities.
First, the reality is that whether we like it or not, we are committed in various ways to protecting the interests of our partners when they are threatened by disruption, as is the case here. The idea that we were not going to play some sort of role in safeguarding the security of the international energy supply that goes through the Strait of Hormuz or the disruption that is happening to sheer production is unrealistic. We’ve got international partners who are dependent on the free flow and access to energy resources, and we don’t have the ability to just pretend like they don’t matter now.

The idea that Asian countries would have to take on more responsibility is in part because the president and others have wanted to distance themselves from US responsibility and roles in the international community, but there’s nobody else to take them up. If we’re not going to be there, then at least for the near term, nobody is going to do these things. That’s an international bit of lawlessness I don’t think we’ll want to live with.

Second, it’s not in our interest to cede this ground with respect to the Iranians. If the Iranians believe we are not going to step up and defend our interests and the interests of our partners in this area, then they’ve got every incentive in the world to continue using force and threatening force as they’ve already done. This goes back to the question of deterrence. Have we done enough to deter Iranian acts of violence; have we done things to encourage them? I think we’ve certainly encouraged them to act through our campaign of sanctions and walking away from the JCPOA, but we almost certainly have not done enough to deter Iranian action, because, as was evident with the attacks, they don’t believe we are going to defend the space that we have committed to defend for so many years.

Q. Will there be a meeting of Trump and Rouhani?
There was always a fairly low likelihood of a meeting, notwithstanding Trump’s comments in this regard. I think he may want to have a meeting, but the Iranian political system wasn’t going to support it. And over the weekend, Iranian senior officials indicated, up to the supreme leader, that they’re not interested in a meeting. I think this makes a meeting pretty unlikely, although I wouldn’t rule it out even now.

There are going to be people in Europe and elsewhere who are going to say, now is actually the ideal time for a meeting, now is the time for restarting negotiations. But I think, ultimately, US policymakers close to the president are going to say, we think you will look feckless if you meet with Rouhani, and that, to some extent, suits their own views on this anyway. So I think there probably won’t be a meeting, and I don’t know that it necessarily matters.

The bigger issue is that there’s no diplomatic process at all between the United States and Iran. That doesn’t have to happen at the presidential level; it should be happening at the secretary of state level. We don’t see any indication that’s happening, or will anytime soon. That’s what’s really frightening today.


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Q&A Energy Markets

Energy and Geopolitical Impacts of the Saudi Oil Attacks