On the morning of September 14, 2019, two drone attacks rocked the landscape at the Khurais oilfield and Abqaiq processing facility. The Houthis (Iran-aligned rebel army) responsible for the attacks, used powerful drone technology to strike the oil facilities from an impressive distance of 1500km away. While both parties’ relationships have been uneasy in recent decades, this attack was one of many planned in the battle between Syria, Lebanon and Yemen, and other countries.
How the Price of Oil is Derived
The price of oil is derived from two sources. Firstly, the supply and demand of oil within large oil companies. Large oil companies and third parties have a large impact on the going price of oil. In the case of the Khurais oil being depleted the supply was heavily affected. Millions of barrels of oil were knocked out (those numbers will be discussed later). In turn, demand thus increased, and the price followed suit. Secondly, oil prices can fluctuate in the stock market. This fluctuation is caused by the futures market. For non-finance readers, a future “is a binding agreement that gives one the right to purchase oil by the barrel at a predefined price on a predefined date in the future. Essentially, the buyer and the seller both lock in their respective prices to sell or buy an asset (barrels of oil) at a date in the future. If oil demand increase, so will future prices, thus resulting in a future rate for oil being much higher. These effects can impact large companies when oil is overpriced or underpriced, and the future value gets misinterpreted. Furthermore, crude oil prices are measured in barrels, these barrels contain 159 litres. The same crude oil barrels are then used when local gas stations begin to price their gas per litre. Therefore, with the price of barrel + the gas and carbon taxes = the price a customer pays at the gas station. Now with a background of how oil works, let’s move onto the significance of the Khurais Oil Attack.
Significance of the Khurais Oil Attack
Khurais oil field has an enormous impact on the global production of oil. Khurais accounts for 1 million barrels of crude oil daily and holds 20 billion barrels in reserve. The Washington Post writes that “the attack on Saudi Arabia’s oil infrastructure immediately knocked out 5.7 million barrels – or nearly 6 percent of the 100 million barrels the world consumes per day“. In addition, it was not noted how long the restoration might take nor if they could continue production. Knowing this, the commodities sector of the stock market saw an immediate rise Monday, September 16, 2019. In the oil futures market, “U.S. benchmark West Texas Intermediate crude was hovering near $60 per barrel, about 10 percent above where it was on Friday [September 13, 2019]”. Not only did investors see hikes in commodity futures, international oil companies like ExxonMobil, Chevron, and BP spiked 1.5-3.2 %. Knowing this, investors and companies were buying oil future contracts at a premium due to the uncertainty of the world oil supply with the Khurais oil field not completely operational.
Impact of the Consumer
With crude oil prices making up around 71% of the price of gas, it is very unlikely that prices at the pump will increase drastically. In the graph provided by “Crude Oil – WTI Continuous Contract” readers can see that the price of crude oil had decreased shortly after the spike. This decrease was due to the Khurais oil field becoming fully operational within a few weeks. Since “it takes about six weeks for oil price changes to work their way through the distribution system to the gas pump. Oil prices are a little more volatile than gas prices“. Due to the lag between crude oil and gas you pay at the gas station, much of the volatility is sorted out before gas prices hit the consumer market. Therefore, the short-term impact on consumers is extremely marginal and insignificant, if all oil fields would be running consistently within the next few weeks. However, consumers could expect to see an increase in crude oil over the long-term. Trade wars and global threats becoming more persistent every day cause a potential increase in attacks worldwide. With this, oil fields that have are a large contributor to global oil production could be knocking out with one hit. Hence, bringing me to the next and final section, a section of a solution.
A New Solution on the Way?
With the nature of oil having such large refineries in a single location, the world of electric vehicles seems to have received a boost after the attacks, notes Michael Liebreich, founder of Bloomberg New Energy Finance. While electric infrastructure may be susceptible to attacks, Liebreich mentions; “I can’t think of a single target that would knock out anywhere near 5 percent of the world’s power supply“. With electricity not traded in a global market, having 5 % of output being cut out in one day would be unlikely. Since electric vehicles are becoming more advanced and accessible, European oil giant BP explains “[Electric Vehicles] capable of being fully charged in five minutes are only two years away”. While completely scrapping the idea of oil would be very outrageous and most likely impossible now, the idea of electric vehicles is increasing in demand. Having less vulnerable to attacks and depletion could cause investors and consumers to consider electric vehicles as an option to less volatile and politically driven environment.
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