Good days of energy security have gone: Op-ed

Mehmet Öğütçü

The easy and secure days are over in global energy security. We are entering a new era due to a number of game-changing energy dynamics including the rise of renewables and unconventionals, climate change awareness, insecurity of strategic maritime chokepoints and, more importantly, serious geopolitical flare-ups around the world.

I believe that we have experienced the “Pearl Harbor of the oil industry” on Sept. 14. Saudi Aramco lost about 5.7 million barrels per day of output after 10 unmanned aerial vehicles struck the world’s biggest crude-processing facility in Abqaiq and the kingdom’s second-biggest oil field in Khurais.

The drone attack, removing 5 percent of the global oil production, will be remembered as a watershed incident in the world oil history. Its impact will be severely felt not only for a few weeks when damaged Saudi oil installations will be repaired and crude supplies will start flowing again business as usual. The impact will be much longer. The world’s largest oil exporter is vulnerable and its air defense system has proven to be ineffective.

For oil markets, it is the single worst sudden disruption ever, and while Saudi Arabia may be able to return some supply within days, the attacks highlight the vulnerability of the world’s most important exporter. They also add further political risk to prices, raising the specter of more destabilization in the Middle East and the threat of U.S. retaliation against Iran. Even, with a price that could easily double, the Saudi remaining exports will still earn amounts close to what they earned before.

The Russians will be great beneficiaries of this escalating crisis as they will earn much more per barrel on their oil and gas exports. Their geopolitical clout has been boosted in Syria, Iraq and Iran, with new approaches to Israel, Saudi Arabia, Egypt and other Gulf nations.

Of course, the United States, now the largest exporter in the world, will also benefit greatly. Remember, prior to this attack, the U.S. was planning to double its crude oil exports to 9 million barrels per day by 2024. That means the U.S. might topple Saudi Arabia as the world’s top oil exporter sooner than planned.

The U.S. is pointing a finger to Iran as behind this attack and said it would provide evidence. This remains to be seen. Traditional U.S. allies are, however, not on-board. Geopolitics and great-power competition are playing a greater role these days, and while that may satisfy some narrow interests, it does not bode well for stable energy prices, or for the secure and dependable delivery of energy along global supply chains.

Only China, which imports most of its crude from the Gulf, will be financially hit at the tune of $1.1 billion for each dollar increase per barrel. Thus, except for China, few of the players will seek to defuse the situation, all feeling that they have little to lose and much to gain. Hence, it would seem that the Sept. 14 attack stands a strong chance of escalating into an all-out conflict.

The sanctions are already cutting $42 billion/year of oil exports from Iran’s economy. They have slashed Iran’s oil production and exports to historic lows. Before the U.S. sanctions, Iran produced 3.8 million barrels/day and exported 2.5 million barrels. Oil made up 80 percent of Iran’s exports. The U.S. ended sanctions waivers for major importers of Iranian oil in May 2019. Iran’s oil exports were down about 2 million barrels and oil production hit its lowest levels since the Iran-Iraq war.

While Saudi Arabia supports economically squeezing the Iranian regime, they may not wish to see a war with Iran. While the context has changed in light of the weekend attack, the reasons have not. Saudi Arabia would find itself on the front line of an armed conflict, with Iran or its proxies to the east, south, and north. Such a conflict would also cripple plans for an Aramco IPO and would cause driving foreign investment from the country. Saudi Arabia has many long-term reasons to showcase its resilience and de-escalate. Until now, Iran and Saudi Arabia were protected by the fear of mutual destruction of their main oil export assets, should one attack the other’s facilities. Now that the Iranians have lost most of their export capacity due to the sanctions, this fear of mutual destruction is no longer there.

How Washington and Riyadh choose to respond (for now limited to rhetoric) will show exactly whether this is a flash in the pan or a step-change in Gulf tensions.

Mehmet Öğütçü is the chairman of the London Energy Club