Saudi attack: Minimal impact on oil prices

The drone and missile attacks in Saudi Arabia (the world’s largest exporter of crude oil) on September 14 resulted to a considerable damage to its oil production facilities.

Reportedly, the attacks that hit and crippled two major Saudi oil production facilities cut the country’s output by a half. As a result, oil prices went up by almost 15% in just one trading day. That’s from US$60.22 on September 13 to US$69.02 on September 16 (the first trading day after the attack).

However, pundits believe that this sudden increase in prices is just a knee-jerk reaction and will be short-lived. Indeed, because what comes next will be purely influenced by how the USA reacts and how soon Saudi Arabia can fully restore its production to pre-attack level.

The truth is, USA has the most influence on oil prices. For one, the USA consumes ¼ of the world’s oil production, making it the largest consumer in the world. However, unlike before when the USA was so dependent on imports, they are now producing more oil and, in fact, have steadily increased their exports.  This fact was confirmed by the Energy Information Agency as it projected earlier this year that the “U.S. is expected to export more energy than it imports by 2020.”

“In 2018, the U.S. imported nearly 10 million barrels per day of petroleum and exported about 7.59 million barrels per day,” it added.

Moreover, Saudi energy minister Prince Abdulaziz bin Salman said at last Tuesday’s news conference that “half of the oil production stopped by the attack has since been restored and that production would be fully restored by the end of September.” Obviously, everything, including prices, will certainly go back to the pre-attack level.

To some extent, we might worry that attacks like these might happen more often on purpose. Well, that could be plausible. Why? This is basically need driven. Of course, we all know that when supply, whatever goods these maybe, is disrupted, prices of such commodities will always go up. Therefore, probably, it could be the ultimate objective of the attack. So, the question is, who shall benefit from such attacks.

Without drawing any conclusion, let us look into these facts. Remember that the OPEC member countries and Russia inked a pact to cut production to raise prices. Though prices moved upward a little, to some of these participating countries, probably, it wasn’t enough. The reason is very obvious and Deutche Bank’s study in 2008 will help us sort this out.

In 2008, Deutche Bank calculated how high oil prices have to be for OPEC and some non-OPEC countries to maintain their budgets. Iran and Venezuela, two of the most vocal and seemingly arrogant countries that are often the first to call for production cuts, need the highest price per barrel of US$95.  Russia needs about US$70, while Saudi Arabia, OPEC's largest producer and de facto ruler, needs about US$55 a barrel.

Obviously, therefore, with the pre-attack (on Saudi) prices hovering just around US$60 per barrel, Iran, Venezuela and Russia, are clearly uncomfortable with those prices. We are not insinuating that they might have orchestrated the attacks, but had prices skyrocketed uncontrollably, these countries should have largely benefited.

With the USA sending troops to Saudi Arabia, supply will surely stabilize. Therefore, there is not much to worry about. What is really worrying are our country’s oil retailers. To recall, right after the attack on Saudi’s oil production facilities, prices of some retailers suddenly went up. Knowing fully well that what they have in their tanks are all purchases prior to the attack, these attitudes are really revolting.

Indeed, historically, driven by greed, there were circumstances wherein certain sectors refused to be fair and cashed in or took advantage in all situations. Some of these are the oil retailers. As we all know, every time global oil prices go up, automatically, oil retailers raise their prices not later than tomorrow, as if they just purchased their inventories today.

That fact is, most of our supplies are imported. Therefore, it shall take at least two weeks for the supplies to arrive. So that, raising prices right away has no basis at all. When prices go down, these same retailers do not reduce prices automatically. Well, logically, because what they have in their tanks were purchased when prices were still high. Simply put, they come straight when global prices go down but are cheats when prices go up.