The September 14 attack on the Abqaiq gas-oil stabilization facility sent shockwaves through the international energy market. After sustaining repeated strikes from drones and missiles, the facility was forced to shut down and 5.7 million barrels per day (Mbd)—about half of all Saudi output—was suddenly taken off-line.
Markets reacted in predictable fashion. On Monday, September 16, prices shot up more than 15 percent, one of the largest one-day increases in recent history, amidst swirling speculation that Iran was to blame for the incident. Analysts pointed to resurgent geopolitical risk: throughout 2019, threats of violence against tankers and a spike in tensions between the United States and Iran in June frequently sent prices into panic mode.
Meanwhile, U.S. officials played down the attack. “PLENTY OF OIL!” tweeted President Trump, who invoked American “energy dominance” as an antidote to global supply disruptions.
The “shale revolution” has transformed American oil and gas production: for the first time since 1948, the U.S. is close to becoming a sustained net exporter of oil.
Analysts have pointed to Abqaiq as evidence of oil’s global, interconnected market, where even major producers like the United States can be vulnerable.
Experts have pushed back against this kind of complacency. Analysts have pointed to Abqaiq as evidence of oil’s global, interconnected market, where even major producers like the United States can be vulnerable. Jason Bordoff, former energy advisor to President Barack Obama and founder of the Center on Global Energy Policy at Columbia University, argued that the Abqaiq attack “is a stark reminder that the United States is not energy independent.”
But the immediate impact of Abqaiq on the oil markets has been… underwhelming.
Soon after the attack, the Saudi government claimed it had enough oil in storage to make-up for the shutdown. According to the new Saudi oil minister Prince Abdulaziz bin Salman, around 2 million out of 5.7 Mbd could come back on-line right away. He promised the facility would be back up-and-running by the end of the month, and on September 25 Saudi Aramco production levels recovered to 11.3 Mbd.
The worst of analyst’s predictions came to nothing. After the September 16 shock, prices began to fall once again, settling back to their previous level of about $56/barrel.
Credit should go to Saudi Aramco, which recovered from the attack much faster than anticipated. Apart from the need to re-start the flow of oil revenues, which remain critical to Saudi state finances and the national economy, the Kingdom’s energy leadership—as well as King Salman and Crown Prince Mohammed bin Salman—are eager to re-position Saudi Aramco for its upcoming IPO.
But the larger reasons for the quick recovery are tied to the fundamentals in the global oil market, which remain largely bearish and hint at a supply glut which has dogged producers since prices collapsed in 2014-2015.
Shortly after the Abqaiq attack, the EIA reported a 2.4-million barrel build in crude inventories, crushing analyst expectations of a decline in domestic U.S. supply.
Rising U.S. production edged higher towards an all-time record of 12.5 Mbd. While output from the mighty Permian Basin fell in 2019, overall U.S. energy production continues to surge, with sustained net exports just around the corner, sending even more oil into an over-supplied market.
Since 2017, Saudi Arabia and Russia have teamed up with the rest of OPEC to cut production in an effort to boost prices. But the cuts have been largely negated by the rise in US production.
The outlook would be a little more bullish if demand forecasts were positive. But signs of a global recession, buoyed along by the on-again, off-again US-China trade war, has depressed market outlooks. The EIA cut its demand forecast in August, while the IEA sees trade war fears depressing demand in 2019.
Oil markets have moved on from Abqaiq, at least in the short-term. But that doesn’t mean the attack won’t leave a lasting impact.
Abqaiq has brought talk of “energy security” back into public discourse.
Abqaiq has brought talk of “energy security” back into public discourse. It’s on old lesson, one that Western consumers and governments learned in 1956 during the Suez Crisis, in 1967 amidst the Six-Day War, and again in 1979 when the Islamic Revolution in Iran took more than 5 Mbd off-line, causing shortages around the world.
With regional tensions in the Persian Gulf rising once again, the Abqaiq incident has illustrated the continued risks of oil dependence.
Responses have been varied. “We need to end, once and for all, our dependence on oil from the Middle East,” declared Sen. Edward J. Markey, one of the sponsors of the “Green New Deal.” To remove the threat to U.S. energy security and combat climate change, the U.S. should institute a ban on fracking and offshore drilling, reimpose the ban on oil exports, and dramatically increase investment into renewable energy.
But “energy dominance” advocates have been quick to respond with their own arguments. Energy Secretary Rick Perry believes that increasing U.S. oil exports would boost global supply and produce a cushion to Middle East interruptions.
“We need to build out our infrastructure to ensure America’s record amount of oil supply gets to the global marketplace,” said Perry during a CNBC segment.
The future of U.S. energy policy is likely to get more contentious. The aftermath of Abqaiq has proven that the global market is resilient to sudden shocks, particularly during periods of bearish sentiment and over-supply—a condition which is partially a result of U.S. production, as Perry noted. Should the world slip back into shortage, however, a repeat of the September 14 attack could have much more serious consequences. And of course, increased oil consumption will only continue to exacerbate the impact of global climate change. The immediate impact of Abqaiq may have been minor, but the long-term lessons from this incident are bound to become more clear with time.
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