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20 September 2019

Oil crisis? What oil crisis? Saudi oil explosions have little effect

The explosions which took out a huge chunk of Saudi Aramco’s oil production last weekend have sent shock waves through the energy industry, because, as we have said many times before, energy is a joined up market.

The political and military issues are currently to the fore with President Trump talking about Iran being behind the drone attacks in tweets. Certainly if the US could track the flight of the drones to Iran held territory, which they certainly could via satellite imagery, then it would leave Iran nowhere to hide, and the US would either retaliate or bring the regime to its knees economically, with few defending it.

But after the political and military overtones are talked through and assuming this is not the start of world war three, then we are left with a 20% price hike in oil for a few days, falling to 10% hike, once the news was fully digested. Saudi says it will have a third of its capacity back online in a day, and the rest not much later. So what, if anything, has actually changed. The biggest issue is that the Houthi movement insists it can mount similar attacks at any time, and there have been UN reports that Houthi’s have missile drones with a range of 930 miles, which curiously probably puts them out of range of the targets it hit, or occupying a location which is closer than has previously been reported.

The loss of more than 5 million barrels per day is the single biggest outage

from a single incident, and equates to 5% of global oil supply. It is not insignificant. But the loss of that capacity for under a week does little to lift the flagging price of oil. If it did, instead of looking at Iran for the culprit, Mr. Trump might look to one of the major US oil companies , because they are the ones who will benefit from a price lift, no matter how brief.

The issue seems to be that Iran cannot get money from its oil, due to sanctions, and it would love to create uncertainty in the market so that someone will break them. But the trouble is that like the US, so many countries have spent time and energy on ensuring they have domestic supply sufficient to keep things alight. The US citizen certainly will not feel any hardship from a price rise in Brent Crude oil, and renewables will not feel even the briefest of relief in having to compete with a source of energy that is rising in cost.

The long term issue in perhaps the 20 year timeframe, is that oil will fall in value, not rise, and that increasingly desperate attempts will be made to “sell off” available deposits as quickly as possible, bringing that day forward when the world will no longer squabble over oil assets in the middle east. Some estimates from the banking community, which we have quoted, say that oil will fall to $10 a barrel by the time renewables are dominant.

Given that renewables contracts are worked out in advance, with a 3 or 4 year run at it, for a period of 15 to 25 years, no renewables contracts will be immediately affected by this spat in the middle east, in either a good way or a bad way.

Militarily the US will be careful to sell some form of anti-missile defense to Saudi, as it has in the past to Israel in the shape of the Patriot missile, and all movements in the region will be scrutinized to identify any mobile launching pads, and if such a thin emerges, it will likely be immediately attacked. But as we say, assuming world war three does not ensue, the energy markets will settle down in days.