Hot Takes on Saudi Oil Attack

I never thought I’d quote Rep. Ilhan Omar (D-MN) about anything. But over the past weekend in Saudi Arabia, “Some people did something.”

“Some people” attacked and blew up a major piece of Saudi oil infrastructure. Houthi representatives in Yemen claimed credit. The U.S. government quickly implicated Iran. Iran denies.

News accounts report that about half of Saudi’s oil export capacity is offline; perhaps for several weeks, or maybe longer. It’s bad, but it could be much worse. Then again, it may get worse.

Or it may rectify faster than we anticipate, because Saudi has entire warehouses full of spare parts.

For now, oil prices are climbing. Oil is up by over 10%, with more to come, no doubt. Indeed, Platts Oil Services – the sober, go-to site for oil price information – predicts oil at $80 per barrel.1

I’ve been following oil, oil prices, geology, the oil industry and much more for 46 years; since I was a freshman in college during the first big oil spike in the fall of 1973. I’m a geologist, and I spent many years in the U.S. Navy, active duty and reserve. I know a few things…

So, here are some hot takes, based on what’s currently out there.

First… Initial accounts from the front lines are nearly always unreliable. Beware believing “too much” of what you hear or see in mainstream media. Figuring out what happened takes time.

Yes, something happened. “Some people did something.” There was video of burning oil, and lots of smoke, per NASA satellite shots.

Smoke Middle East

Smoke from Saudi sites that were attacked. Washington Post.

The U.S. government quickly blamed Iran, but offered nothing immediate in the way of supporting evidence. There are rumors that Iran launched drones and cruise missiles. But rumors are not “evidence.”

Evidence, such as… Where are the radar tracks? Electronic intercepts? Forensic analysis of downed attack systems, or bits and pieces picked out from the rubble? These things take time to assemble, and we are way too close to the actual event for any of this to be clear.

On Monday, the U.S. showed satellite shots of damage to Saudi facilities, claiming at least 19 impact points. Here’s one shot.

Damage to Infrastructure

Slight damage to infrastructure. AP News.

We see damage to four storage tanks; precise holes in similar spots on each tank. Evidently the tanks were empty or mostly empty when they were struck. That is, they are still intact, and barely even scorched by fire.

Still, the imagery shows precise targeting and impacts. This attack is not the work of amateurs. It’s not a pick-up game here. Clearly, there was planning and very good targeting information along with sophisticated delivery systems.

According to Associated Press, “U.S. officials said additional devices, which apparently didn’t reach their targets, were recovered northwest of the facilities and are being jointly analyzed by Saudi and American intelligence.” 2

Keep in mind, Saudi Arabia owns hundreds of billions of dollars’ worth of U.S., British, French and other defense systems. These include high end radars and electronic intercept systems, plus anti-air systems. Yet a truly critical piece of energy infrastructure was hit by 19 or more weapon carriers; drones and/or cruise missiles.

Perhaps Saudi defenses saw incoming weapons; or not. Perhaps some attack systems were shot down, or just crashed. We don’t know yet. Still, this whole mess doesn’t say much for Saudi competence at defending critical energy infrastructure. The bombers got through.

More worrisome, Saudi is surrounded by U.S. bases, ships, air-search systems and military people, plus contractors from defense firms; all beneath the watchful, constant-stare of U.S. satellites orbiting overhead. Much of the U.S. effort is geared towards keeping eyes on Iran. Yet apparently, U.S. forces in the region were caught by surprise as well. Draw your own conclusions.

Aside from the direct blow-by-blow of the recent attack, it’s well known that the Saudi government needs money. Saudi is in the process of raising cash by selling part of its Aramco oil production company. Saudi has discussed offering for sale up to 5% of the firm to raise in the range of $40 billion. This may be problematic now, considering the clear vulnerability of Aramco oil assets to attack. Who wants to buy a target?

On a broader scale, who benefits as oil prices rise? Let’s begin with a graph showing the world’s largest oil producers. Saudi is (was) the world’s third largest oil producer last month. Not anymore. Looks like winners include the U.S., Russia, Canada and Iraq.

Saudi Arabia Chart

Recently, the U.S. became the world’s largest oil producer in terms of barrels per day. The U.S. is NOT “energy independent” though. Don’t be fooled by political rhetoric. The U.S. imports large volumes of oil every day to keep the economy running.

The U.S. exports light crude from fracking wells plus refined products. The U.S. imports other forms of crude and refined product to keep the pipelines and tanks filled. It’s a very complex system. Don’t believe “Rah! Rah!” claims of politicians that the U.S. is free of issues on the world of oil. The U.S. is joined at the hip to global energy markets.

In one sense, higher oil prices benefit U.S. oil producers. Extra money from rising oil prices is especially important because pretty much all recent U.S. oil production gains are due to high-cost fracking. Overall though, the U.S. fracking business has lost a lot of money. I discussed the rash of oil company bankruptcies in a recent article, here. So higher prices – even temporary – give the sector a shot in the arm.

Higher oil prices will definitely translate into higher fuel prices at the pump. The Saudi attack, and oil knocked offline, will affect motorists; stand by for when you go to fill your tank. Expect to pay 25 cents per gallon more for gasoline, fairly soon.

Plus, higher oil prices – higher prices for refined fuel – will add costs to farming, trucking, railways, shipping and airlines. Higher fuel costs will drive up costs for construction and mining industries as well. You’ll see higher oil prices translate into inflation for goods and services across the economy.

The saving grace for the U.S. is that higher fuel costs for U.S. buyers will mostly transfer to U.S. workers in the oil patch, and to the general supply chain. You might not like paying more to fill your tank. But at least you’re creating a paycheck for an oil worker in Texas or Louisiana, or a steel pipe maker in Illinois or Ohio.

Higher oil prices will also benefit Canadian oil sand producers. And really, those guys deserve a break after many years in the doghouse. Canada’s oil sand production is relatively high cost, coupled with transport issues for what verges on being a “stranded asset,” out in Alberta without sufficient rail or pipeline takeaway capacity. (Long story.)

For at least a while, Canada’s oil sand product will command a higher price based on scarcity of Saudi oil. Couple that with related refining qualities for Canada’s heavy oil that feeds North American refineries. It’ll be good for the overall financial health of the North American energy sector.

Hey, we could even see the Canadian dollar strengthen, which will be nice for all those Canadians who spend time in the U.S.

Don’t forget to thank God for the Strategic Petroleum Reserve (SPR)! There’s nothing quite like the U.S. having 630 million barrels of SPR oil squirreled away in salt caverns to buffer any temporary supply impacts from losing 5 million barrels per day of Saudi output.

Just the promise of a SPR release helps to moderate market sentiments. Indeed, President Trump announced willingness to tap into SPR at 6:00 PM Eastern, Sunday evening, just as oil markets were opening in Asia. Right signal; right time.

To all those U.S. politicians over the years who wanted to sell off SPR… Well, the nicest way I can phrase it is that you guys are idiots. The nation is sooo lucky we dodged your stupid ideas in the past. This is why SPR is there… for times like now. And get used to it, because we’ll see more of these oil interruptions in the future.

As for the Democrat candidates for president in 2020 who recently promised to ban fracking, offshore leasing and drilling, drilling on federal lands, etc? You pandered to the hard-left, anti-oil base of the party, and now you’re painted into a deep policy corner. Good luck talking your way out of this one.

Still, Democrat candidates… Go right ahead, boys & girls… Campaign on a policy of less U.S. oil and making the nation more dependent on foreign imports. That’s how we wound up so deeply involved in the Middle East in the first place.

Oft-times, it’s fair to say that there are no “easy” strategic decisions. But then, there are some decisions that are pretty obvious. And a strong North American energy industry, coupled with SPR, is truly a no-brainer.

That’s all for now… And on that note, I rest my case.

Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

1 Saudi attacks, supply risk could cause prices to test $80/b: S&P Global Platts Analytics
2 Trump: US locked and loaded for response to attack on Saudis, AP

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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