Analysing the Economic Impact of the Saudi Arabia Oil Attacks

Analysing the Economic Impact of the Saudi Arabia Oil Attacks

Daniel Lacalle 20/09/2019 8

The drone attacks on Saudi Arabia had an important impact on the country’s oil infrastructure, but we should not exaggerate its impact on world supply.

1) Saudi Arabia is the OPEC country with the largest spare capacity. Although the drone attack impacts 5% of global supply, it also comes at a time when supply glut was evident, global inventories are large and substitution is relatively easy.
 
 
2) The IEA estimates the ‘call on OPEC’ at 28.3 mbd in 1H20. This is a downward revision of 0.2 mb/d compared to its previous forest and a substantial 1.4 mb/d below OPEC’s August output.
 
3) Global oil demand will likely peak in three years, plateau until around 2030 and then decline sharply, according to forecasts by energy adviser DNV GL.
Meanwhile, U.S. crude oil production is expected to rise by 1.25 mbpd in 2019 to a record of 12.24 mbpd,  according to the US EIA. The output in 2020 is forecast to rise by 990 kbpd to 13.23 mbpd, also according to the EIA.
 

4) OPEC was already planning a production cut last week given the glut in supply, weakening demand and loss of market share.

Demand for OPEC crude in 2019 was revised down in September from the previous OPEC report to stand at 30.6 mb/d, which is 1.0 mb/d lower than the 2018 level. Demand for OPEC crude in 2020 is expected to remain unchanged from the previous report, to stand at 29.4 mb/d, around 1.2 mb/d lower than the 2019 level.

5) Although the disruption is relevant (5% of world output), but ample inventories, spare capacity, and rising technological diversification and substitution are likely to mitigate the impact as demand is more than adequately supplied.
 
 

6) Other supply cuts in the past have generated very different impacts on the oil price, from exponential rises in the 1973 oil crisis to very small increases in attacks in Libya or Nigeria. It is worth highlighting the diminishing impact of unplanned production cuts on the price of oil after the US energy revolution. Since then, when there have been aggressive cuts, hurricanes or geopolitical risks including sanctions against Iran and Venezuela, those events have not raised the price of oil more than 12% for one or two months, according to MeanMarkets .The 2017 production cut, for example, generated only an 8% rise and oil has remained below $ 80 a barrel despite sanctions on Iran, hurricanes and other geopolitical risks, in addition to the unquestionable desire of OPEC producers to get a barrel at $100.

Aramco has confirmed that production will be fully restored by Tuesday, September 17th according to Bloomberg, also reaffirming it has ample inventories and alternative supply sources.

OPEC-disruptions-1.jpg

In The Energy World Is Flat, we explain how technology, substitution, and diversification are flattening the energy world and preventing aggressive inflationary pressures.

The energy broadband is back.

Although Aramco has confirmed to suppliers that there will be no disruption and that production will be fully restored by the 17th September, oil prices may spike on the uncertainty and news of different impacts. What is hilarious is that the Saudi Arabia drone attack may drive oil prices to soar, and central bankers may hail the rise in consumer inflation as a success.

OPEC-oil-and-inflation.jpg

 
 
 
A version of this article first appeared here

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  • Claire Wynne

    Saudi Arabia is out of money, and the recent drone attack from Iran on its oil refinery didn’t help.

  • Adam Purcell

    Leave it alone America!!!!! Stay the hell out of it..

  • Paul Fletcher

    We've sold them plenty of arms they can defend their own country. We don't need to send our boys over there.

  • Chris Woods

    Good analysis

  • Scott Nelson

    We need to take care of our own and stop giving our money to people who could care less about us.

  • Rob Gallagher

    Let the middle East solve their own problems they can fight it out then the United States can go in take on the winner take the oil and the championship belt and be done with it.

  • Tom Cahill

    Saudi Arabia made a terrible mistake by attacking Yemen.

  • Aaron Hibberd

    I despise Saudi Arabia as much as Iran and they’re no better.

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Daniel Lacalle

Global Economy Guru

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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