Quite a few faces must be smiling in Tehran right now. Even if Iran wasn’t directly responsible for the attack on two Saudi oil facilities, it is without question benefiting from the fallout. The spike in oil prices on Monday and dire warnings about the new risk to global supplies has given Iran valuable political and economic ammunition in its conflict with the United States. Or has it?
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The case for why the attacks are a “game-changer” or even a “Pearl Harbor moment” depends on picking statistics selectively.
The Saturday attacks on the crude-processing facilities at Abqaiq and Khurais knocked out about half of Saudi Arabia’s petroleum production, or 5.7 million barrels per day, equal to more than 5% of the world’s supply. Though Cruise missiles may also have been used, the attacks also exposed the vulnerability of Saudi oil infrastructure to armed drones — simple, low-cost weapons that any minor league terrorist group could theoretically employ.
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Moreover, the incident confirms the fear everyone has long had that the world economy is skating on the thin ice of energy supplied from politically unstable places like the Gulf, Venezuela, Nigeria and Russia. It recalls the frequent crises in the Middle East — the 1979 Islamic revolution in Iran, the 1980s tankers war between Iraq and Iran, Iraq’s invasion of Kuwait in 1990 and the early days of the Arab Spring in 2011, all of which caused oil prices to rise on geopolitical anxieties.
On Monday oil prices staged their biggest intraday gain since the 1991 Gulf War that followed Iraq's invasion of Kuwait.
But other statistics tell a more complicated story. The first is that later on Monday the price for Brent futures, a widely used oil-price benchmark, fell back from a high of $71.95 a barrel (a 19.5% increase) to $65.77 (an 8.4% increase).
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True an 8%-plus rise in a single day is significant, but the price is still lower than it has been for much of the last year. If the market really thought this was the start of a new and dangerous era of heightened risk for petroleum supplies the reaction would have been more sustained than a couple of hours.
And why did the panic subside? Because the world is producing more oil than it consumes right now, even after the Organization of Petroleum Exporting Countries cut its output.
By one estimate it would take five months of a five million-barrel-per-day outage to take global crude supply levels back to their 40-year average. The world economy is slowing and demand for oil is growing more slowly than supply. Meanwhile, there is plenty of oil in the global strategic reserve to cover any short-term shortfalls. Even the Saudis have a strategic reserve.
Nice little refinery you have there
The oil glut has been Tehran’s problem all along in its efforts to resist U.S. sanctions: No one really needs Iranian oil because they can get it elsewhere, so why should anybody defy the U.S. sanctions.
It’s no coincidence that when panic set in over the attacks in Saudi Arabia, Iran jumped in with an offer to ramp up oil output to “maximum production” if sanctions are lifted.
Assuming Tehran was behind the attack to begin with, it’s running nothing less than a geopolitical protection racket: “A nice little oil refinery you have there — it’d be a shame if anything happened to it.”
The real worry isn’t a shortage of oil now: we have over-production. The worry is that the world doesn't have a lot of spare production capacity in case it needs to compensate for a long-term loss of Saudi or other oil.
The fact is that right now too much oil is being pumped, but there isn't that much oil available that isn't being pumped. Supply and demand is balanced towards supply now. But in case of a real catastrophe, we have a problem – there isn't much spare capacity. Most of what spare capacity exists is
that most available oil is being pumped , most of that in in Saudi Arabia and Iran. So if a second natural or manmade loss of a critical facility follows this one, the world could really be in trouble.
Is that a real risk? Trump spoke about American being "locked and loaded,” but it’s more likely he was talking about the thumb he uses to issue inflammatory tweets than dispatching planes and missiles.
More likely, the conflict between America and Iran, such as it is, will continue in the same way it has until now — an occasional, anonymous pot shot at a sensitive target, as was the case in May when in the space of a couple of days Saudi pumping stations were hit by drones and four tankers were damaged by explosions in the territorial waters of the United Arab Emirates.
That means the latest attacks do spell heightened risk, and it's exactly the kind of risk that markets don't cope with well. It's the "black swan" sort of risk, where the odds of a particular event occurring are tiny, but if or when they happen, the impact is enormous (in this case a real war could happen, or a lucky strike could knock out a major oil installation for a lengthy period).
What we’re seeing is the market trying to swallow a black swan — a bird it doesn’t like to be served and has difficulty digesting. But unless the attacks this weekend signal the start of a real conflict — something, it appears, neither the U.S. nor Iran want — the political risk seems containable.