Saudi Arabia and the World’s Oil Market

As a nation, Saudi Arabia is home to the second largest oil-reserve in the world, including over 268 billion barrels of oil; and accounting for approxiametely 42% of the country’s GDP.

Introduction

For the past 2 years, pipelines, tankers and other petroleum installations have been attacked at various, separate periods of time. Recently, however, Saudi Arabia endured an attack that was deemed by the Guardian to be “a hit to the jugular of the kingdom’s oil industry”. The attack, which occurred on September 14th, impacted half of the country’s overall oil supply, and 5% of the world’s daily oil supply.

What happened?

Summary

Explosions occurred at around 3:30AM that morning, destroying a portion of Saudi Aramco’s facility, known both as “the kingdom’s crown jewel” and serving as the country’s oil company, run and operated by the state.

Responsibility for the attack was eventually tracked down to the Houthis, an Islamic armed and political movement that originally began in the 1990s — linked to Iran. The Houthis have been involved in a Saudi Arabia military coalition in recent years, and after the group obtained a set of drones (with technology capable of striking a certain target from 1 500 kilometers away), the group was found responsible for the attack. A total of 10 drones attacked the state oil facilities, including those in both Abqaiq and Khurais.

Governments of surrounding countries continue to speculate the exact origins of the attack, yet many of them believe that it developed from Iran or Iraq. As stated by the Saudi Arabia energy minister, Prince Abdulaziz bin Salman, with regard to the incident, “these attacks are not only aimed at the vital installations of the kingdom, but also on the global oil supply and its security, and thus pose a threat to the global economy.”

What impact does this actually have on the world stage?

Abqaiq and the Importance of Oil

Since the beginning of trade, raw materials have had a great importance on how countries trade, produce and succeed. One of these raw materials, prevalent in the production industry, is oil. Oil is of use for production, transportation, the generation of electricity, asphalt, road oil, and other forms of energy — and is one of the largest contributors to the GDP of Saudi Arabia. However, other countries, such as Canada, the United States, Russia and China also house large quantities of the resource.

When the heart of one of the largest oil producers and processors is damaged, it is not only a big deal for Saudi Arabia, but for the countries who rely on their oil production as well.

Abqaiq, the largest oil processing facility in the world, is tied closely with the stability and circular flow of the country’s economy, and therefore, due to its importance, was supposed to be insulated from the instability that exists within the Middle East. Yet, the successful attack on the facility unveils that both the facility, as well as the energy infrastructure sector as a whole, may be much more vulnerable than originally intended, and an easy target for possible future attacks.

Analysing the Implications: What This Means for Financial Markets

The oil attacks caused prices to rise around the world, with the price of Brent crude oil skyrocketing to approximately $72, 20% higher than it was prior to the attacks, at $60 per barrel. If supplies and production are not brought back quick enough, global economists predict that oil prices could rise even higher, with prices already higher than they have been since the 1980s.

An increase in oil prices is no good news for countries who rely on oil for much of their development, and puts pressure on Saudi Arabia to patch up the problem as soon as possible. Higher oil means higher costs for transportation of other goods, and augments the prices of products that require petroleum for production, due to the increase in demand for the original raw resource, catalysing inflation.

Inflation in turn means that the prices of household goods becomes higher, and less disposable income is left in the pockets of consumers. Though it might be on the other side of the globe, world events are connected by economies — impacting everyone in some way.

Written by Lauren Fong, Writer for the Junior Economist

Originally published on September 23rd, 2019