I imagine no one missed the news about the attacks on Saudi Arabia’s oil production facilities in Abqaiq and their oil field in Kurais. I think it’s fair to call it an oil crisis given the spike in oil prices and the extent to which it impacted global oil production. There are lots of interesting economic effects such a supply shock can have, especially for such an important industry for the global economy as oil but I want to instead focus on the geopolitical implications of the attacks. Can Saudi Arabia let such a brazen attack pass by without retaliating? Probably not, but what can Saudi Arabia do to punish the attackers and prevent such attacks in the future? If you’re not well versed in oil lingo you might want to check out Ipoleco’s beginner’s guide to oil before continuing.
I want to start by saying that as far as I have been able to tell it’s a bit unclear where the attacks came from. Houthi rebels in Yemen have claimed responsibility and both the Saudis and Americans have claimed that Iran had a hand in the attacks but it’s not clear that it wasn’t some other Iranian proxy which were responsible. It seems almost certain that Iran gave some sort of support to the attackers though, and it makes sense given the hostile attitudes between Saudi Arabia and Iran. As for retaliation I believe it’s a matter of how rather than if. Saudi Arabia is in a tight spot in the sense that it has to retaliate not to look weak but at the same time it isn’t ready for a confrontation with Iran given how much the Saudi Arabia and United Arab Emirate (UAE) coalition in Yemen have struggled against the Houthi’s even with some US support. Interestingly, Saudi Arabia already operate missile defence systems supplied by the US which seems not to have helped against the attacks so I don’t know how the Saudi’s could better defend themselves, or credibly argue that this was a one-off event. Returning to the subject of retaliation, Saudi Arabia’s petrostate model requires a certain oil price for the public finances to work, and by extension for the royal family to remain in power, and a belligerent stance towards Iran would likely frighten the oil markets and raise oil prices. As I mentioned in Ipoleco’s guide to oil, Saudi Arabia requires the oil price to be around ~$90 which is almost $25 higher than current prices as of the time of writing. Saudi Arabia has powerful incentives to retaliate forcefully. If the US decides to back Saudi retaliation things can get bloody.
Hopefully cooler heads prevail as higher oil prices can put serious pressure the world economy. I imagine a recession in Germany, which already looks possible, becomes far more likely if the oil price rises from instability in the Middle East. A German recession would have ripple effects all over Europe and a higher oil price would have a more pronounced effect on China and India which are more reliant on fossil fuels than Europe. What might seem a faraway conflict which only matters at the pump for the average person turns out to be a hugely important event which could affect the entire global economy.
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Written by Karl Johansson, Founder of Ipoleco
Cover photo by Life of Pix on Pixabay
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