- Significance of Saudi Arabia
- How extensive is the damage?
- Impact of attack on Saudi oil filed
- Steps taken/expected after the refinery attack
- US- Iran relations
- Way Ahead
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- Global oil prices surged the most on record after a strike on a Saudi Arabian oil facility removed about 5% of global supplies, an attack the US has blamed on Iran.
- Meanwhile, The United States has issued satellite images and cited intelligence to back its claim that Iran was behind attacks on the oil facilities. Iran denies involvement in the air attacks, which were claimed by Iran-aligned Houthi rebels in Yemen.
- This attack was not the first attack of its kind. Since the war in Yemen has started in 2015, Houthis have used drones to disrupt Trans Arabian pipeline and other oil terminals. However, these attacks were marginal compared to the recent attack.
Significance of Saudi Arabia
- Saudi Arabia is the largest oil exporter in world. It produces more than 10-million-barrel oil per day.
- Saudi Arabia also leads the Organization of the Petroleum Exporting Countries (OPEC) as most of the decision taken in OPEC are generally influenced by Saudi Arabia. For instance, after crude fell to a seven-month low in August 2018, due to Saudi Arabia’s insistence, OPEC agreed to cut down oil production.
How extensive is the damage?
- The recent Saudi oil disruption is greater than oil disruption occurred in 1979 Iranian revolution and in 1990 Kuwait war when Saddam Husain fired the oil reservoirs.
- The damage to oil refinery was such that the fires could be even seen from space, as images captures by NASA’s satellite.
Impact of attack on Saudi oil filed
- India imports 83% of its total crude oil requirement. Out of these imports, nearly 70% comes from Middle east, in which Saudi Arabia is currently largest oil supplier. Given such heavy reliance of India, any disruption in Saudi Arabia’s oil system can have adverse impact on India.
- Countries such as China, US, Russia etc. have about 90 days of strategic oil reservoirs. On the other hand, as second largest importer of crude, India has hardly had oil for 10-12 days in its reserves. India have strategic oil reserves of 10 million tons against the requirement of 20 million tons per month. However, this will not be much significant problem as India can get oil from other countries.
- Moreover, due to slowdown in the global economy, major countries such as US and Russia are exporting oil at much faster rate than previous times. There are also other non-conventional sources by which oil can be obtained. Hence, for the time being, the supply of oil is not a big problem.
- The main problem is the volatility of oil price. If the oil prices remain in higher side for longer period, it can trigger inflation, can have adverse impact on economic growth and on social discontent.
- The severe volatility in oil prices may also pose uncertainty. Some years back, even $10 increase in crude price increased inflation by 1 % in India. However, due to diversified nature of current economy, the volatility of crude oil price may trigger at least 0.5% inflation in India.
- The recent attack took out about 50% of Saudi Arabia’s oil exports and 5% of total crude production in the world.
- Given the status of largest oil producer, after such attack, the risk premium on Saudi’s oil filed will increase. Saudi Arabia may install new missile shield system across their major oil fields. Increased risk premium and such defence mechanism will result in increase in Global oil prices.
- Geopolitics always affects oil supplies and oil prices. If escalation between government and Houthis as well other radical groups increases, oil supplies and prices will further be affected.
Steps taken/expected after the refinery attack
- If Saudi Arabia can restore their attacked refinery within a month, then countries that are dependent on Saudi Arabia has enough oil reserved to keep their economy under control.
- One possibility to fill the oil gap created by attack is to increase the oil production by the OPEC countries which Saudi Arabia told to curtail oil production after crude fell to a seven-month low in August 2018. However, that oil is not significant as it was just few hundred thousand barrel of oil.
- The surge in oil price after Saudi’s refinery attack came to normal due to the fact that Saudi Arabia has many underground reservoirs through which it can provide crude oil and can stabilize oil prices. However, this can only last for several weeks.
US- Iran relations
- US held Iran for recent Saudi attacks. US president also fired his national advisor as he was in disagreement with key aspects of US president’s policies towards Iran (having agreement with Iran) and other countries. This moves will adversely affect US-Iran negotiations.
- In addition, the US-Iran tension was recently rose when Iran shot down US drone and US President called off attack on Iran just before 10 minutes of military strike. This shows that US can easily attack on Iran.
- Iran has also threated that if its oil supplies are hindered, then it could close the passage of ships through Strait of Hormuz, in which more than 20% of world’s oil flows.
- US might attack on Iran two bases: i) Iran attacked on Saudi Arabia’s oil fields ii) Iran breached the Nuclear deal by doing more than 20% uranium enrichment which will enable it to use uranium for weapon purposes.
- On the other hand, Iran has also warned US that all the US based in middle east are well within the range of Iranian Missiles.
- Although Iran has less capabilities than US, it has enough capabilities to do damage in gulf. Even the small patrol boats of Iran hampering desalination plant can create great chaos. The attack on desalination plant can also put pressure on Indian government to bring back 8 million immigrants residing in Saudi Arabia due to domestic pressure.
- Given the above scenario, there is no possibility on progress of US-Iran negotiation in foreseeable future.
- India is heavily depended on imports for crude oil. Hence, there has to be a medium term and long term oil strategy.
- India have huge coal resources. However, due to mining problem and climate concerns, India is not able to use it profitably. Hence, India should apply better technology to coal processing.
- Indian government should review its policy regarding Iranian oil which now India don’t import. Now, If Russia, China and other countries are buying oil from Iran, India should impress US that India should also be allowed to buy Iranian oil as Iran is offering several concessions in terms of credit facility, insurance etc.
- India’s total energy consumption is just only 40% of world’s energy consumption, while that of china is of double and US is of five time of world average. Hence, as the consumption of India’s energy will increase, India should increase its renewable energy sources to reduce its oil dependency.