The story so far: Early on September 14, two critical Saudi Arabian oil installations near the Gulf coast came under attack. The drones and missiles that attacked the Abqaiq processing facility and the Khurais oilfield, both owned by Saudi Arabian Oil Company (Saudi Aramco), set off fires which lasted for hours and caused enormous damage, leading to a spike in international crude prices. The attack has also escalated geopolitical tensions in West Asia with the U.S. pointing fingers at Iran and Tehran in turn denying any role in the attacks and warning against any action against it.
How will this development affect the world?
The attacks can have a lasting economic and geopolitical impact. Saudi Arabia is one of the largest producers of crude oil in the world. It produces a variety of grades of crude, including light grade crude which is in high demand in Asia. It produces nearly 10 million barrels of oil every day. In August, the kingdom exported, on an average, 7 million barrels a day. With its spare capacity — the ability to turn up supply to meet emergency demand situations — Saudi Arabia continues to play a critical role in global price stabilisation. In the past, it had pumped up supplies in the event of geopolitical shocks. At present, when the U.S. sanctions are cutting off Iranian oil supply to the global market, consumers are looking at Saudi Arabia and Iraq to make up the fall. Given the critical role it plays in supply, any major attack on the Saudi oil industry will rock the markets. That is what happened on Saturday.
What was the extent of damages?
Abqaiq is the world’s largest oil processing facility. Nearly two-thirds of the total Saudi supply is refined at Abqaiq. The attacks, reportedly carried out with drones and missiles, destroyed the spheroids at the facility that are used to process crude oil, and wrecked five of its 18 stabilisation towers. Satellite images showed that two towers at the Khurais oilfield, some 180 km south-west of Abqaiq that produces more than 1 million barrels of crude a day, were damaged. The attacks knocked out about 5 million barrels of oil output a day, nearly half of the kingdom’s daily production and over 5% of the global output. Following the attacks, crude prices spiked on Monday — the price of a barrel of Brent crude jumped 20% in the morning and closed at $69.02, 14.6% higher than last Friday’s close, the largest single day percentage gain in at least three decades. On Friday, September 20, the Brent crude price closed at $64.77.
Who is behind the attacks?
Yemen’s Houthi rebels have claimed responsibility for the attack. The Houthis, a Shia militia backed by Iran, and the Saudis are locked in a conflict for over five years. Saudi Arabia intervened in Yemen in March 2015 on behalf of the country’s “internationally recognised government” after the Houthis captured Sana’a, the capital city. Since then, the regional coalition led by Saudi Arabia and backed by the U.S. has carried out a number of air strikes on Yemen, while the government forces fought the Houthis on the ground. But the Houthis are still controlling the capital city and much of the country’s north. In recent months, they have carried out cross-border drone attacks, targeting Saudi oil assets and an airport. The Houthis have claimed that the September 14 attacks were in retaliation to Saudi air strikes. But the attacks on Abqaiq and Khurais were, unlike the past drone hits by the Houthis, highly sophisticated. The drones and the missiles evaded Saudi Arabia’s U.S.-supplied air defence system and attacked the heart of the kingdom’s oil industry with pinpoint accuracy. This raised doubts on whether the Houthis possess such advanced capability to successfully carry out such attacks. After releasing the satellite images of the hit facilities, the U.S. has said that the attacks originated from the north or west — pointing to Iraq or Iran — not from the south (Yemen, where the Houthis are operating from). Saudi Arabia later concluded that Iran, whose oil sales have tanked amid biting U.S. sanctions, sponsored the attack.
Are Saudi oil facilities safe?
Recent incidents in the Gulf suggest that neither oil facilities nor supply lines in the region are safe. Since May, oil tankers that pass through the Strait of Hormuz, a choke-point connecting the Gulf (also known as the Persian Gulf and the Arabian Gulf) with the Arabian Sea through the Gulf of Oman, came under multiple attacks. In June, Iran shot down an American drone alleging that it had violated Iranian air space, taking tensions between the two countries to the brink of a conflict. Iran has also seized a British-flagged vessel near the Strait of Hormuz after an Iranian ship was captured by British forces off Gibraltar (it was later released). The incidents near the Strait of Hormuz were a stark warning to global oil trade as a third of crude oil exports transported on tankers pass through the strait.
Now, the attacks on Saudi Arabian oil installations expose the kingdom’s defence too. Unnamed Saudi officials told American media that their air defence had failed to detect and prevent the attacks as they came from the north. The Saudi and U.S. focus, they say, is on the kingdom’s southern border with Yemen from where the Houthis fire drones and short-range missiles. Whatever the reason, the attack showed that there are holes in Saudi Arabia’s defence system. The kingdom, which spends over $80 billion a year on its defence budget (Saudi Arabia was the third largest defence spender in 2018, after the U.S. and China) could not protect its most critical economic assets.
What is Iran’s strategy?
Iran has denied any role in the attack on Saudi oil facilities. But whether Iran was directly involved in it or not, it cannot escape blame as it is backing the Houthis in Yemen’s civil war. The attacks also fit in with Iran’s strategy of disrupting the global energy markets using its military clout in the Gulf in retaliation for the U.S.’s sanctions. After the Trump administration withdrew from the Iran nuclear deal, Tehran waited for a year, urging other signatories including the European Union, Russia and China, to fix the agreement. It wanted to continue to enjoy the promised economic benefits. But those countries remained spectators as American sanctions cut off Iran’s oil industry, critical for the country’s economy, from the global market. Iran’s economy has been in a free fall since Mr. Trump reimposed sanctions. Most of the European companies that promised investments after the nuclear deal was reached have already pulled out of the country. Even countries such as India, one of the top buyers of Iranian crude, cut imports drastically after the U.S.’s sanctions.
The International Monetary Fund has forecast that Iran’s economy will contract by 6% this year. The World Bank has predicted Iran’s GDP shrinking by 3.8%. An economic crisis also means more domestic challenges for Iran’s dictatorial theocracy. The U.S. wants a subjugated, battered Iran to return to talks. But Iran’s rulers picked another strategy — instead of caving in they started pushing back. Iran started violating the nuclear deal step by step while launching attacks at the same time, either directly or through its proxies, on the energy supply lines or infrastructure in the Gulf. Iran has come up with “maximum resistance” to Mr. Trump’s “maximum pressure”.
What is the Saudi Arabian plan now?
Saudi Arabia has claimed that it has partially restored output after the attack. Saudi Aramco chief executive Amin H. Nasser has said the company plans to fully restore production by September-end. The kingdom has also promised that its supply commitments will not be affected as it is tapping reserves and, according to one report, even planning to import crude from Iraq. But even if Saudi Arabia meets its supply obligations and restores full output quickly, the energy markets will remain volatile as geopolitical tensions remain high in the Gulf. There is now a three-way conflict in the region. One, Saudi Arabia and Iran are backing rival factions in Yemen. Saudi bombings have caused enormous damages to Yemen, while the Iran-backed Houthis are targeting Saudi oil assets. Two, in the wider West Asia, Saudi Arabia and Iran are vying for greater influence. Saudi Arabia has the support of most of the Sunni majority countries, while Iran has established solid influence in at least four regional capitals — Baghdad, Beirut, Sana’a and Damascus. Three, tensions between the U.S. and Iran are growing. U.S. President Donald Trump, in response to the September 14 attacks, has decided to step up sanctions on Iran.
But Iran has been aggressive in its responses ever since Mr. Trump pulled the U.S. unilaterally from the nuclear deal in 2018 and re-imposed sanctions on Iran. The fresh sanctions are unlikely to change Iran’s behaviour, given recent incidents. And if the U.S. or Saudi Arabia launch a war on Iran, it could trigger an all-out conflict, as Tehran has warned, that could throw the global energy market into greater turmoil. In short, the Gulf is on a dangerous slope.