Vulnerabilities to world oil supply exposed

Market Line 20 September 2019 (Last Updated September 20th, 2019 12:34)

World Oil: Most of the world-leading oil-producing states are extremely reliant on income from oil despite the rapid expansion of policies aimed at economic diversification.

The recent attack on Saudi Arabian oil supplies has revealed serious security concerns for the global economy following a spike in oil prices.

Both Saudi Arabia and the US point the finger at Iran as being behind the drone strike on the Abqaiq oil-processing plant and the Khurais oilfield in Saudi Arabia on 14 September.

Though Saudi Aramco, the Saudi state-owned oil monopoly, pumped reserves onto the global oil market to relieve pressure on international prices, the spike in prices has shown how vulnerable oil is to infrastructure attacks.

When the oil installations were knocked out 5% of world production ceased. Given Saudi Arabia’s relatively high level of defence spending and technical sophistication of its security infrastructure, that such an attack could be so easily executed means world supplies are now at somewhat increased risk.

Four days after the attacks, Saudi energy minister Prince Abdulaziz bin Salman said 40% of the disrupted capacity at Abqaiq had been restored. Though the recovery is continuing at speed, if attacks on critical oil infrastructure were to occur in other oil-producing countries, the response is likely to be less rapid.

Moreover, terrorist organisations may feel emboldened having been presented with a practical example of the damage a well-executed assault on an oil installation can have. Often stretching for hundreds of miles, oil pipelines are especially at risk even though smart technology has improved matters somewhat in recent years.

Need for heightened security is now clear

Yemeni Houthi rebels backed by Iran have claimed responsibility for the attack and claim to have dozens of sites in the UAE on a list of targets.

Kuwait has reportedly carried out air and navy exercises in response, elevating its state of readiness to combat the threat.

However, this is not a long-term solution. Though costly, major oil-producing states must now undertake significant improvements in security for their key oil production sites and supply routes.

Economically this is important. Most of the world-leading oil-producing states are extremely reliant on income from oil despite the rapid expansion of policies aimed at economic diversification.

Geopolitics exacerbates the future disruption to oil supply

Oil prices rose substantially in response to lost production capacity; at one point prices were 20% higher than immediately before the drone strike took place.

The impact has been worse than it otherwise could have been owing to the state of geopolitics concerning economic chokepoints around the world.

Iranian production continues to be subject to US sanctions, with major customers deterred from buying oil from the state. Libyan supply continues to oscillate thanks to the ongoing conflict and Venezuela has all but fallen out of the picture.

If flows from these three countries, and others besides, were somewhat more reliable, the impact from the sudden loss of Saudi Arabian supply would not have been nearly as great.

Worse still, if allegations the attack was the work of the Iranian government are substantiated, the Persian Gulf region will become more volatile still, driving up the risks of further disruption.