Saudi Attack Damages Kingdom’s Role as Guardian of the Oil Market
Saudi Arabia is fixing its energy infrastructure and restoring crude production, but the weekend’s attacks may have done irreparable damage to one of the kingdom’s greatest assets — its role as guardian of global oil markets.
For decades, Riyadh has kept a buffer of spare production capacity that was used as shock-absorber during times of crisis from the Iraqi invasion of Kuwait in 1990 to the Libyan civil war of 2011. Even when dormant, the spare capacity is credited for keeping a lid on prices, amplifying Saudi Arabia’s influence over the global market.
That role was badly damaged by Saturday’s attack on the Abqaiq processing facility. Traders were alarmed by how easily a swarm of drones or missiles knocked out what was supposed to be the oil market’s last line of defense. As long as hostilities persist between Saudi Arabia and Iran — blamed by U.S. officials for the Abqaiq strike — there’s a chance it could happen again, according to consultants Petromatrix GmbH.
“After this weekend, we have to consider that the Saudi spare capacity is effectively non-existent as long as maximum sanctions are imposed on Iran,” said Olivier Jakob, managing director at the firm. Tehran has denied involvement in the attack.
Even as the kingdom promised on Tuesday to keep oil exports flowing as normal, it acknowledged that its supply buffer for the next two months will be at half normal levels. Total production capacity will rise to 11 MMbpd this month, and then full levels of 12 MMbpd by the end of November, said Energy Minister Prince Abdulaziz bin Salman.
Even then, Riyadh will need to reckon with the possibility that the world won’t have the same degree of faith in its guardianship.