The strike on the heartland of Saudi Arabia’s oil industry, including damage to the world’s biggest petroleum-processing facility, has driven oil prices to their highest level in nearly four months.
Why is it so disruptive for oil suppliers?
The attack on Saudi oil facilities on Saturday not only knocked out over half of the country’s production, it also removed almost all the spare capacity available to compensate for any major disruption in oil supplies worldwide.
The attack cut 5.7 million barrels per day (bpd) of Saudi crude output, over 5 per cent of the world’s supply. But the attack also constrained Saudi Arabia’s ability to use the more than 2 million bpd of spare oil production capacity it held for emergencies.
The kingdom has for years been the only major oil producing country that has kept significant spare capacity that it could start up quickly to compensate for any deficiency in supply caused by war or natural disaster. Most other countries cannot afford to drill expensive wells and install infrastructure, then maintain it idle.
Before the attack, the Organization of the Petroleum Exporting Countries (Opec) global supply cushion was just over 3.21 million barrels per day (bpd), according to the International Energy Agency.
Saudi Arabia - the de facto leader of Opec - had 2.27 million bpd of that capacity. That leaves around 940,000 bpd of spare capacity, mostly held by Kuwait and the United Arab Emirates. Iraq and Angola also have some spare capacity. They may now bring that production online to help plug some of the gap left by Saudi Arabia - but it won’t be enough.
Haven’t Opec and it’s allies been cutting output? Can’t they just reverse those cuts?
Yes, Opec and its allies such as Russia have cut output to prevent prices from weakening because the market has been oversupplied. Those cuts aimed to reduce supply by 1.2 million bpd. But much of that was from Saudi Arabia so it now cannot be reversed quickly.
Non-Opec members such as Russia are pumping near capacity, with perhaps only 100,000-150,000 bpd of available additional production.