The Larger Implications of the Oil Attacks in Saudi Arabia

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This article was originally published by Political Violence @ a Glance on 17 September 2019.

Drone attacks allegedly by Houthi rebels this past weekend on the Abqaiq facility and the Khurais oil field effectively knocked out five million barrels of processed crude oil from the world market. If this number doesn’t sound impressive, it amounts to about 5% of the world’s energy supply. Although the Iranian-supported Houthi rebels have been targeting Saudi Arabia in retaliation for their participation in the civil war in Yemen, this attack is different. Knocking out this critical facility will potentially cause prices to rise significantly for almost every commodity due to the reduction of global energy supplies. Since energy influences the price of transportation, which in turn influences the price of food and other commodities, this may cause prices of goods and services of all types to rise globally. Recent estimates suggest that the price of oil may rise from $60 to over $100 per barrel. That is an enormous shock that will be felt worldwide.

One might ask why this is a concern for the US, given that domestic oil supplies are rapidly rising and American production has surpassed that of Saudi Arabia. In my forthcoming book Monsters to Destroy: Understanding the War on Terror, I argue that the US has long guaranteed the security of the kingdom. In exchange, the Saudi royals agreed to recycle substantial amounts of their oil profits to the US in the form of bank deposits and purchasing American treasuries. These inflows of US dollars allow American interest rates to remain low, even as the US runs a considerable trade and budget deficit. How does this benefit Americans? Lower interest rates allow US citizens to borrow cheaply to purchase homes, cars, education, and to start businesses. Without access to these inflows, it is possible that both the US government and its citizens would have to spend less and save more, all while paying higher taxes and raising interest rates. In short, the status quo where the US protects the Saudis and the Saudis recycle their profits provides substantial benefits for both sides.

However, as I argue in my book, this financial gain provided to Americans comes with a price. If the US wants to continue enjoying this relationship, it must provide the Kingdom with permanent protection. Already, Saudi concerns about the US’s ability to do so are growing. These stem from the failure of the US to subdue the Sunni and Shi’a insurgencies in Iraq in the mid 2000s, American inaction as Hosni Mubarak of Egypt fell at the start of the Arab Spring, and the unwillingness of the US to intervene in the Syrian conflict, even after Assad utilized chemical weapons. Further, US politicians are now openly attacking the Saudis, both for the brutal campaign in Yemen and for the Khashoggi murder. Couple this growing hostility with the stalemate in Yemen, where the US initially assisted the Saudi campaign, and the collapse of the coalition in the south following the withdrawal of UAE forces, the Saudis have good reason to be skeptical US commitment to the kingdom.

The destruction of the Abqaiq facility may call the value of this security guarantee into further doubt. In this case, even though the US has a clear interest in protecting the kingdom’s oil infrastructure, it was unable to. This attack is unlikely to be the last. The Iranians and the Houthi rebels will observe the damage this attack created, and will almost certainly try again. These attacks create tactical losses for the Saudis while strategically signaling that the US is not a credible protector of global oil markets. The Iranians will also have every incentive to escalate activity in the Strait of Hormuz to further cast American credibility into doubt. Approximately 20% of the world’s crude supply passes through this critical point—and the Iranians have already signaled their willingness to cause disruption. Since President Trump openly declared that he was uninterested in engaging in retaliation against Iran for this activity, it is reasonable to believe that the Iranians may continue. The incentive to do so may be even greater now that Saudi Arabia’s state-owned oil company, ARAMCO, is attempting its first Initial Public Offering. Raising doubt about Saudi stability at this point can only benefit the Iranians, harm the Saudis, and indirectly harm the US.

Although these scenarios sound bleak, there are a few reasons to believe that all may be well. In the short term, although there may be some price shocks, the Saudis have already declared that they will rapidly try to repair the facility. Further, the US domestically has substantial reserves and spare capacity to offset the damage. Another possibility may be to relax sanctions on Iran to allow their oil to hit the market, though this is very unlikely. Nonetheless, there is some ability to recover. The Saudis also may have no alternative but to continue their longstanding policy of relying on the US. Despite the setbacks, the US is unique in its vast military capacity, the size of its industry, and the ability to project forces into any continent fairly quickly. The Wahhabis are going to need American support as the war continues in Yemen and their facilities face increasing vulnerability.

However, in the long term, this should not make Americans too comfortable. The Saudis are already beginning to look east as far as their energy sales are concerned. They are also increasingly viewing the Russians as a potential partner rather than an adversary. Further, China is now their biggest purchaser of oil. If the US cannot provide security, these other states that are aligned with Iran might be able to broker a peace in Yemen. If so, a day may come where the Saudis cease the ‘generosity’ they extend to the US. This strike, where the Saudis have been hurt and the US could not stop it, may give this relationship another push.

About the Author

Navin Bapat is Professor in Political Science and the Chair of the Curriculum of Peace, War, and Defense at the University of North Carolina – Chapel Hill.

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