ASX News: Saudi Oil Facility Attack – Impacts
Following the attacks on the Saudi oil facility at the weekend, which caused the biggest supply disruption in 50 years, US oil futures marked the sharpest daily rise in more than a decade. Brent, the international benchmark, logged the sharpest gain on record.
Oil ‘supply shocks’ have historically done significant damage to the global economy. That due both to the loss of economic activity due to higher transportation costs and because of the inflated cost of producing the myriad products derived from oil, particularly chemicals and plastics.
Consumers around the world could see costs rise for products ranging from petroleum and diesel, to home heating costs and airfares. As the cost of transportation rises, that could mean shipments of other goods, such as groceries, could also increase in the coming months.
Crude oil is refined into fuel including petroleum and diesel. When crude prices rise, the cost of fuel rises with it. Other factors are also important in the retail price, such as local taxes and fuel standard regulations. Crude, however, is the biggest factor.
Crude accounts for 50% of the retail price, so as crude goes up, so does the retail price.
Rising prices for fuel, especially diesel which fuels heavier-duty vehicles such as trucks and farming equipment, will increase transportation costs for companies shipping products from the factory and the farm.
Manufacturing industries that require a lot of energy supply, like automotive production and chemicals, could also pass on costs if their expenses increase.
Consumers could see rising costs for foods like fresh produce, which often has to be shipped from other regions.
Prices will start to rise almost immediately. Looking at petrolspy.com.au, we can see that some outlets have already raised prices from around 130c per litre, to as high at 172c.
Surging oil prices have the potential to disrupt the global economy if the rise is sustained. With the global economy already suffering through economic slowdown, rising input costs are the last thing needed. China for example, which is a major importer of oil, is already showing signs of economic strain.
In response to the attacks, Trump said he authorised the release of oil, if needed, from the Strategic Petroleum Reserve (SPR) to mitigate any price surges. The US Department of Energy said the 645 million barrels from the SPR, the largest stockpile of crude in the world, would be made available “to offset any disruptions to oil markets as a result of this act of aggression.”
The SPR was last tapped in 2011.
The key to any further price rises and impact on global economic activity will likely be the length of any supply disruption to Saudi Arabia’s production and the possibility of further escalation between Saudi Arabia and those responsible for the attack of its Abqaiq plant and Khurais oil field. Trump on yesterday said the US was “locked and loaded,” suggesting that military action may be undertaken. US Secretary of State Mike Pompeo has blamed Iran for the attacks, which Tehran officials have denied.
Tensions are already elevated between Iran and the US. after Trump pulled out of a global nuclear pact and imposed fresh sanctions against Iran.
The attack also shows how vulnerable critical global infrastructure can be, as one wouldn’t expect such a scale of damage in Saudi Arabia, especially considering they together account for 50% of the country’s oil output.