On Saturday, ten drones attacked Saudi Arabia’s largest oil processing facility at Abqaiq and the Khurais oilfield. The coordinated attacks originated from Yemen, where Iran backs Houthi rebels and supplies them with lethal aerial hardware. U.S. Secretary of State Mike Pompeo swiftly blamed Iran, saying there was “no evidence the attacks came from Yemen.”
The kicker, of course, is that the attacks were brutally efficient, cutting Saudi oil-production capacity by 5.7 million barrels per day. This tally is half of overall Saudi production and roughly 5% of world production. Only the 1956-7 Suez Crisis disrupted a larger percentage of global oil. Markets will move on Monday, and likely be jittery all week.
The most pressing question is when this production can come back online. Aramco’s president and chief executive officer Amin H. Nasser pledged to have a clearer answer to this question within 48 hours. Another anonymous Aramco spokesperson said that most production will restart “quickly” or “fairly quickly.” Others foresee disruptions lasting weeks.
Regardless, the audacity of the attack and severity of the outcome make this a dangerous moment. It presents U.S. President Donald Trump with his first major foreign policy crisis. It could cause a rethink of the securing-the-Gulf-at-all-costs strategy, more likely than not dragging the Americans deeper into the region. The consequences for the oil market are uncertain, besides a likely spike in price in the short term. The attacks ultimately serve as a litmus test for many of the assumptions that have undergirded the global energy system for the last five decades.
Trump’s first foreign policy crisis
The most pressing question is how long Trump will permit Iranian-backed attacks on a key U.S. ally that very much favors the president. Saudi Arabia was Trump’s first trip abroad after entering office, after all, and the Kingdom appreciates his “tougher” approach to Iran. The rub, however, is that Trump has done little more than his predecessor Barack Obama to change Iranian behavior in the region.
Iran has been an intractable U.S. enemy for decades. Obama’s strategy was to show diplomacy and then, when that failed, to bring sanctions. This resulted in the 2015 nuclear deal. By ripping up that deal, reinstating sanctions, and bringing increased diplomatic pressure on Iran, Trump has maneuvered himself into a corner. His only option now, made acute and urgent by Saturday’s drone attacks, is to unleash military force to no particular end.
Trump, however, is reluctant to do this. He was “cocked and loaded” to strike Iran in June when drones blew up a Japanese tanker carrying Iranian oil but ultimately pulled back. Foreign wars have become political losers in America since the Iraq and Afghanistan debacles under George W. Bush. With an election coming up in 2020, Trump will likely employ more bluster and brinkmanship on Iran without following through. Saudi Arabia is likely to be disappointed in their man, and for that we are all grateful.
Gulf security rethink
Saturday’s drone attacks will also prompt a revision of U.S. policy towards the Gulf. The United States first brought troops to the region in the late 1970s after the Soviet invasion of Afghanistan. The Reagan Administration increased this commitment dramatically and engaged in the First Tanker War with Iran. After Iraq’s invasion of Kuwait in 1990, America established bases in Saudi Arabia and other Gulf states. The most likely outcome is that Washington will bolster its forces in the region, leading to a far more tense and potentially destructive Second Tanker War.
This would be unfortunate. In December 2016, Charles L. Glaser and Rosemary A. Kelanic penned an article for Foreign Affairs entitled “Getting Out of the Gulf: Oil and US Military Strategy.” The article distilled the findings of their book Crude Strategy: Rethinking the US Military Commitment to Defend Persian Gulf Oil. Glaser and Kelanic argue, to be put it simply, that the $75-billion annual Gulf security commitment is no longer worth the cost. Previous Middle East interventions, they note, have had mixed success and have mostly undermined interests and engendered hostility. Supply and demand dynamics, moreover, no longer demand U.S. protection of foreign oil.
Events yesterday and earlier this summer reinforce once again how expensive the Gulf commitment is for the United States and for what? If wise heads prevail in Washington, a downward revision in security commitments emerge.
Finally bringing balance?
Since 2014, the oil market has been oversupplied despite OPEC’s halfhearted attempts to cut supply. U.S. shale is the primary reason, as is lower oil demand. On some levels, then, the attack on Abqaiq could turn out to be a net positive. Higher prices seem safe to forecast – always in producers’ interest. And, it could be the kind of disruption that truly rebalances the market.
The signal worth monitoring is the International Energy Agency, which requires member counties to hold strategic petroleum reserves that can last 90 days. The agency confirmed yesterday that oil markets are “well supplied” to handle this outage.
In the long term, even if the Abqaiq outage brings some balance to the market, it does not bode well for Middle East producers. The security premium attached to oil-supply security has largely disappeared in recent years. Its return would bring further uncertainty into the global calculus, already on soft footing with U.S.-China trade war.
Yesterday’s events will test, over the coming months, many assumptions and long-held commitments about the need to secure oil. The world now sees fossils fuels as the depleting, failing environmental and sustainability solution to our energy needs that they are. Oil has always proved resilient in the past, but a sustained price rise and additional price volatility could further push consumers towards alternative energies. This is one more drop in the barrel in favor of the energy transitions. One day, the barrel will overflow.
Picture: Oil Tanker at Abqaiq Oil-Processing Facility; Credit: Wikimedia Commons.