By: Paa Kwasi Anamua Sakyi   The September 2019 drone and missile assaults on the world’s largest oil processing facility in Saudi Arabia disrupted output and exports, taking out roughly 5.7 million barrels of daily crude production ― nearly half the country’s total output, and close to 5 percent of global crude supply. However, not much happened after the incident. Very recently, a U.S. airstrike killed up to 10 Iranian and Iraqi military personnel including Iran’s Revolutionary Guards’ (Overseas Forces) commander, Qasem Soleimani. Iran responded with a missile barrage at two U.S. bases, and there was a plan by the U.S. to deploy air and missile defense troops in Saudi Arabia, and a promised increase in U.S. sanction against Iran. So far, there have been little panic in the oil market, and no sign of a stock market collapse. The audacious assaults could have caused major supply and price disruptions, and sets the stage for a new and dangerous period for world oil markets. Past events including the Iranian Revolution of 1978-79 that took approximately 5 million barrels per day (9 percent of global supply) off the market, at a time when oil demand was rising and the Saudis weren’t able to fill the gap, explains why some observers in the heat of the moment thought that the attacks on Saudi facilities at Abiqaiq would push prices up to high levels. According to Montgomery (2019), world prices did rise to US$69 per barrel the day after the Saudi attacks, but quickly fell back to around US$64, where they’d been for much of the summer. Again, following the assassination of Qassem Soleimani, prices went from $US66 per barrel to US$69, then down to US$65, in a matter of few days. The Saudi attacks and the killing of the Iran’s Qassem Soleimani are very serious new happenings in the Middle East ― a volatile region crucial to global oil supply. Yet they had no significant impact on crude oil prices.  The Middle East The Middle East is home to major oil and gas producing countries like Saudi Arabia, Qatar, Libya, Iran, United Arab Emirate, Iraq, and Kuwait. Endowed with close to half of the world’s known oil and gas reserves, the Middle East region is a bedrock of the global hydrocarbons supply architecture. Saudi Arabia, Iran, Iraq, and Kuwait alone holds over 100 billion of barrels in proved reserves, according to CIA World Factbook January 2018 figures. In 2018, the region provided close to 32 percent of global oil production, and 22 percent of global gas production, as reported by the Energy Information Administration (IEA). Since crude oil resources are predominately located in the Organization of the Petroleum Exporting Countries (OPEC) Middle East, these countries are expected to have significant leverage in the world crude oil markets by taking into account a range of uncertainties. In the context of OPEC, Saudi Arabia have earned the role of a swing producer, changing its quantity of oil production in order to stabilize the price in response to market changes. Modern Arab oil-exporting economies are heavily dependent on oil, with hydrocarbon and government activities accounting for the majority of total Gross Domestic Product (GDP) in nearly every Middle Eastern country, according to the International Monetary Fund (2016). In Saudi Arabia, for instance, the petroleum sector accounts for roughly 87 percent of budget revenues, 42 percent of GDP, and 90 percent of export earnings (Forbes, 2018).

The Strait of Hormuz is one strategically important strait (narrow strip of water) that connect the Persian Gulf with the Arabian Sea and the Gulf of Oman. The Strait remains the world’s most important because of the large volumes of crude that flows through the strait. A 2019 report of the U.S. Department of Energy (DoE) suggest that in 2018 close to 21 million barrels of oil, or the equivalent of 21 percent of the world’s traded oil flowed on ships through the Strait of Hormuz on daily basis. Oil vessels that move oil from the Middle East through the Strait connects with destinations such as Singapore, Japan, India, China, South Korea, and United States. The inability of oil to transit a major chokepoint, even temporarily, can lead to substantial supply delays and higher shipping costs, resulting in higher world energy prices. Although most chokepoints can be circumvented by using other routes that add significantly to transit time, some chokepoints have no practical alternatives. For the Strait of Harmuz, there are limited options to bypass, as only Saudi Arabia and the United Arab Emirates have pipelines that can ship crude oil outside the Persian Gulf (EIA, 2019; DoE, 2019). Past Crisis and Disruptions Previous Middle East conflicts resulted in greater disruptions of the oil market. Typical of this is the 1973-1974 OPEC oil export ban, which saw oil prices quadrupling within a space of six month, pummeling the U.S. economy, and causing consumers to wait hours in long lines at gas stations. The decision by the 12 OPEC members in October 1973 to stop exporting oil to the United States and to a number of countries (mostly Western) was in retaliation for the U.S. support of Israel during the Yom Kippur War (Amadeo, 2019; Koch, 2013) The Iranian Islamic Revolution of 1979 and the subsequent Iran-Iraq war marked another steep price hike on the oil market. The revolution and the events in its aftermath reduced global oil supply by 9 percent, according to International Energy Administration (IEA) estimates. The Strait of Hormuz became an arena of conflict, with each side in the so-called “Tanker War” threatening to sink the other’s energy exports. And to avoid being targeted, Kuwaiti Oil Tankers were flagged under the U.S. shipping registry, obscuring their true ownership during the period. Although crude oil continued to flow, marine insurance rates for vessels operating in the strait spiked by as much as 400 percent (The Conversation, 2019). After supply surplus and price stabilization in the 1980s, there was another price increase as Iraq attacked Kuwait, marking up the beginning of the first Persian Gulf War. The August 1990 Iraqi invasion of Kuwait led to a surge in the price of oil from US$15 a barrel that month to US$40 by October ($65.68 adjusted for inflation as of 2019). The price surge occurred because the Iraqi invasion took out exports from both countries, amounting to 4.3 million barrels per day, or 5 percent of global supply. It took Saudi Arabia to replace the loss from its reserves. Also in February 2003, the lead-up to the U.S. invasion of Iraq once again led to a spike in prices to nearly US$40 a barrel, or around US$55 in today’s dollars, a level that hadn’t been seen since the Gulf War (OPEC, 2019). Recent Disconnection Striking on Saudi Arabia’s Abqaiq oil processing facility in September 2019, Assassination of the Iran’s top military commander and a subsequent retaliation by Iranian missile strikes on US military bases in Iraq few weeks ago, geopolitical tension boiling, and continues conflict in North African oil rich country of Libya. These are threatening new events in a volatile region essential to global oil supply. Yet they hardly manifest on the oil market, even in combination. The price hikes accompanying these hostilities was short lived. 10 years ago, these geopolitical events would have shot prices far higher and not fallen back so quickly. But that isn’t the case today, because there has been a dramatic shift in the global oil market, thanks to the United States. The new reality of world oil supply that has recently emerged explains why panic remains unlikely with recent geopolitical activities. And central to this reality is the remarkable growth of American Shale Oil production that helped boost global oil stocks, and helping handle supply shocks in the market. In less than a decade, America’s crude oil production has grown rapidly to surpass that of both Russia and Saudi Arabia, rising from 5.5 million to 12.2 million barrels of daily production to become the world’s top crude producer for the first time in more than 40 years. Meanwhile oil production is projected to reach over 13 million barrels per day in year 2020, with other petroleum liquids production, especially those derived from natural gas expected to rise to unprecedented levels of 18 million barrels per day (EIA, 2019). The lifting of a four decades ban on oil exports, has moved exports from near-zero to more than 3 million barrels per day by mid-2019, overtaking most countries in the OPEC group. And within a decade, America’s need for imported crude have fallen from 60 percent to as low as 8 percent, according to EIA’s latest Short Term Energy Outlook. What these scenarios mean for the global oil market is that the market has gained a massive new source of crude oil supply, and diluting the traditional source of imports. In effect, the market is better supplied than in the past, and the historical anxiety of overdependence on Middle East’s supply has been eliminated. Of course this hasn’t kept oil prices from being volatile at times, but it has added a degree of background stability where geopolitical shocks just don’t register, like they used to in the past.   Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security (IES) ©2019 Email: [email protected] The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media and CNBC Africa.