Chronicle of the Middle East and North Africa

The Saudi Oil Crisis is One that Could Affect Us All

Specials- Abqaiq
A destroyed installation in Saudi Arabia’s Abqaiq oil processing plant is pictured on September 20, 2019. Photo: Fayez Nureldine / AFP

The effects of an attack on a major Saudi oil facility on 14 September 2019 have been felt far beyond the powerful petrostate. The incident brings a network of states and allies closer to direct military confrontation while rocking stock and energy markets.

The drone strike targeted oil facilities belonging to Saudi Arabia’s national energy company Saudi Aramco in Abqaiq, a gated community in the Eastern Province. The swarm attack that involved 25 drones and missiles hit both the largest crude processing plant in the world and the Khurais oilfield about 110 miles south-west of Abqaiq, which produces about 1.5 million barrels of crude oil each day. Satellite imagery showed at least 18 strikes.

Other attacks have occurred previously but none has caused such extensive damage, which saw around 50 per cent of the kingdom’s oil production shut off.

Houthi rebels immediately claimed responsibility. The Houthis have been the target of a Saudi-led coalition in Yemen’s civil war opposing the government led by Abd-Rabbuh Mansour Hadi.

The United Nations has called the situation in Yemen the worst humanitarian crisis in the world that, if it ends in 2019, will be responsible for 233,000 deaths (both combat and indirect deaths). The Houthis threatened to escalate its military activities if the war continues.

The recent attack comes at a critical time for Saudi Aramco, as the company is pursuing an initial public offering and the Abqaiq plant is its most important facility. Saudi Aramco has since shown journalists around the site but said it may take several months for normal production to resume.

Despite the Houthi claim of responsibility, Iran has widely been blamed for the attack, with the United States (US) citing intelligence to back up its allegation. Satellite imagery reportedly shows that the impact points came from west-north-west, which would implicate Iran or Iraq, rather than Houthi-controlled Yemen to the south-west.

According to the independent think tank Crisis Group, however, any credible evidence showing Iran’s involvement would mark a ‘‘stark departure from Tehran’s strategy of pushback through proxies and plausible deniability’.

Iran accused US Secretary of State Mike Pompeo, who levelled the accusation, of deceit while President Donald Trump indicated in a tweet that military action was a possibility once the perpetrator was known.

“Iran is just playing it very cool, unlike the Americans who are confused and sending out incoherent messaging,” said Iran analyst Mahan Abedin. Pushing back against America’s ‘maximum pressure’ campaign, Iran is expected to respond with ‘maximum resistance’.

Abedin said this could happen in a number of ways whether in the Persian Gulf, with Iran defending its interests as it did earlier this year when it shot down an American drone violating its airspace, or on the nuclear front by continuing its incremental scaling back of the 2015 Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, from which the US withdrew in May 2018.

“I’d be very, very amazed if they [the US] go for the kinetic option because there would be so many unintended consequences coming out of it,” Abedin said, adding that the only option left is for the US to change its maximum pressure policy and return to the nuclear deal.

Naysan Rafati, an Iran analyst at Crisis Group, believes that if Iran were behind the attack, it was likely motivated by the perception that Riyadh has been complicit in the maximum pressure campaign that has damaged Iran’s economy.

‘By hitting the refineries, [Iran] hopes to force the US to step back from this campaign lest continued chaos trigger a substantial rise in oil prices, with economic repercussions in the US as the 2020 presidential election draws near,’ he wrote in a briefing for the think tank.

The major concern is that an attack like this could trigger a regional conflict drawing in Iran, the US, Yemen, Saudi Arabia, Israel and Iraq. Iran might also retaliate by helping the Houthis to escalate military action in Yemen.

Israel, which has so far remained silent on the incident in public, has reportedly signalled in private that it believes ‘Iranian hawks felt they needed to change the facts on the ground in order to avoid the possibility of renewed negotiations under heavy sanctions, which could have resulted in Iran acquiescing to an unfavourable agreement’.

Furthermore, Israel is frustrated by what it sees as the US and Saudi Arabia’s restraint against Iran. Neither does it take lightly the use of precision weapons like those seen in the oil attack and which it believes Iran has been trying to introduce in Lebanon and Syria, where Israel has ongoing military stakes.

For its part, Iraq forcibly denied any involvement in the attack, to avoid being made ground zero in a potential proxy war. Although Iraq has now been discounted as a staging ground for the attack, there may still be pressure on Baghdad to fall in line with sanctions against Tehran and reign in its paramilitaries, according to Maria Fantappie, senior adviser on Iraq at Crisis Group.

Other nations, such as China, have joined in condemning the attack. The country’s Foreign Ministry spokesperson, Hua Chunying, said that relevant parties must “avoid taking actions that bring about an escalation in regional tensions”.

Unease in the markets was reflected in a spike in oil prices as global oil supplies dropped by 5 per cent. Middle East stock markets lost ground due to the political situation and “fear about disruption to production”, according to David Madden, a market analyst at CMC Markets UK.

The US mitigated the drop by drawing on an emergency stash it has kept since the 1970s when an embargo by Middle East nations caused global oil prices to skyrocket.

The uncertainty has also impacted companies, no more so than Saudi Aramco itself as the company’s stock market plans stalled. Non-oil companies have been affected too, such as cruise operator Carnival, whose share price dropped by 3 per cent in early trading due to higher oil prices eating into profits.

According to Rob Subbaraman, head of global macro research at Nomura Holdings, “A negative supply shock like this, when global growth is in a synchronized slowdown with many geopolitical hotspots simmering, is just what we don’t need.”

Oil prices were already under pressure due to the US-China trade dispute, a slowing global economy and Iranian sanctions. The largest drop in crude prices was seen in August, when President Trump announced more tariffs on China. The Organization of Petroleum Exporting Countries has been reigning in supply as well, while usual oil trade from Iran faces barriers from the US’ punitive measures.

The effects on oil has had a ripple effect on spending and other markets such as gold, which rose over 1 per cent to $1,503.69 per ounce, while silver jumped 2.8 per cent to $17.92 per ounce.

With the threat of a regional conflict looming, diplomatic off-ramping and interventions from outside players may help to relieve tensions, despite the posturing of hawkish stakeholders. The economic effects caused by the reduction in oil trade could be absorbed within months, but the possibility of future attacks could produce longer lasting consequences.

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