ON Saturday, armed drones attacked Saudi Arabian oil facilities. Iranian backed Yemeni Houthi rebels claimed responsibility. United States Secretary of State Mike Pompeo blamed Iran for coordinated strikes on the heart of Saudi Arabia’s oil industry, saying, “They marked an unprecedented attack on the world’s energy supply.”
Others blamed the Saudi government for the attack, to increase the price of oil and to enhance its initial public offering (IPO) of shares of the Saudi national oil company Aramco.
The initial estimate is that as much as 50 percent of the Saudi’s oil output will be off line for an undetermined amount of time. This represents about 5 percent of the global oil supply, and that is, of course, significant. Again, initial estimates are that crude oil prices could jump as much as $5 to $10 per barrel or about 10 percent to 20 percent spike.
Who benefits from a massive supply disruption and an increase in oil prices?
The idea that Saudi would cut production through a “false flag” attack to potentially raise the value of its IPO of Aramco is interesting. Of course, a reduction in output would hurt its oil revenues more than an increase in price. Further, that this was done to increase the value of IPO is also shaky. The IPO will constitute only 1 percent of the total shares of Aramco and is scheduled for some time before the end of 2019. But this listing will only be on a regional exchange and would not be widely available to foreign investors. Another 5 percent of the shares are scheduled to be sold sometime in 2020 or even 2021, perhaps on the Tokyo stock exchange.
Blowing up its oil facilities this past weekend would probably make the Guinness Book of World Records under the “Shoot Yourself in the Foot” category. But who knows.
The Houthi rebels gain a huge psychological advantage against its Saudi enemy and stick a finger in the eye of the US, which is backing the Saudis. Likewise, Iran stands to benefit from higher oil prices and puts some leverage on the US to lift sanctions against Iran to sell its oil.
While higher oil prices are not in the best interest of the US economy, remember that the US is the largest exporter of oil to the world and is the only country that has the excess capacity to make up the 5 percent oil supply shortfall. Also, the US has a large oil reserve stockpile that could be released to temper price increases in the US market.
At this point, no one really knows what will happen to oil prices in the long term. However, Kyodo Newsagency made this important analysis: “While the outage may not last long given redundancies in Saudi oil infrastructure, the attack may build in a premium to oil prices that has long been absent due to complacency.”
The last thing the Philippines needs is high oil prices as we experienced in 2008 and in 2011/2013. The Philippine inflation rate has tracked the general trend of the global crude oil price since 2000, including last year after the tax increases.
Like it or not, we must find a way to increase domestic crude oil production as quickly as possible. This may mean doing business with the “country-that-shall-not-be-named” on the other side of the West Philippine Sea.