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The Saudi Arabian “Energy Disaster” that Isn’t a Disaster

A few days ago, “news” from Saudi Arabia indicated that we were staring down the barrel (no pun intended) of $80 or even $100 oil. Uh-oh…

Last week, air attacks shut down over half of Saudi oil export capability. Reportedly, about 20 drones and perhaps 9 cruise missiles were used in a sophisticated hit on key Saudi oil infrastructure. It all looked very grim.

Now, however, we learn that it might not be all that bad.

The authoritative Oil & Gas Journal reports that “More than half the 5.7-million barrels per day (b/d) of production affected by the disruption [has] restarted. Saudi production capacity … will be partly restored to 11 million b/d by the end of September and fully restored to 12 million b/d by the end of November.” 1

Plus, news is out that there were no deaths or injuries to Saudi Aramco workers or contractors, per company and CEO Amin Nasser. “I am enormously proud of the courage, dedication and proficiency of our people who ensured there were no injuries,” he said in a press release.2

Allah be praised! Damage is not so bad after all. And we can be grateful that no one was killed or even injured.

Apparently, the global energy disaster isn’t really a disaster. Much of the petroleum doom and gloom of the past few days has been overtaken by more upbeat news.

Yet as we follow the facts, something very strange appears to be going on…

On Sept 17, I wrote that “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.”

We still don’t really know “what happened” with the aerial attack on Saudi oil facilities. And those who do know won’t tell us.

Still, there are tantalizing hints. We’ve been told that about 20 drones and perhaps 9 cruise missiles hit Saudi oil processing facilities and caused significant damage.

The U.S. – through Secretary of State Mike Pompeo – promptly blamed Iran. Iran immediately denied perpetrating the attack.

The Houthis of Yemen, south of Saudi, quickly claimed credit for the attacks. Houthis are at war with their northern Saudi neighbors, and there’s no love lost.

The Saudi position is that the attack originated with Iran’s Revolutionary Guard Corps (IRGC), and definitely not from the south in Yemen.

Doubtless, there’s more work for intelligence services from the U.S., Saudi and others. There’s much more evidence to review. People are replaying communications chatter, radar tracks, electronic signals; they’re looking at satellite imagery from up above, and digging out burnt debris from sites of explosions.

By now, the intelligence community has ideas. But the nature of these investigations is that most serious analysis remains under lock and key. Here in civilian-land, you and I don’t “need to know,” as the saying goes.

We’re still in the dark. But let’s think about the attack on Saudi in terms of what we do know. Compare the attack on Saudi with another attack from a different era, World War II.

One major air assault of the war in Europe was Operation Tidal Wave; the U.S. raid on German-controlled oil facilities at Ploesti, Romania on August 1, 1943.

Bombers

177 U.S. bombers attack Ploesti, Romania; U.S National Archives.

The strategic idea behind attacking Ploesti was to destroy German energy resources over at least the near and medium term; to leave the German army and air force with empty gas tanks, so to speak.

To accomplish the mission, U.S. commanders sent 177 heavy, B-24 bombers to raid Ploesti. Out of this force, 53 bombers were shot down; 55 returned to bases, but were damaged. Over 660 aircrew were lost. Over 100 civilians were killed on the ground.

And when all was said and done, Ploesti was back up and running within a matter of weeks.

Ploesti involved significant numbers of people and aircraft. It was a major effort, with major losses. Overall, Ploesti was a costly mission, and is today considered by military historians as an example of strategic failure; an expensive use of resources that failed to achieve long-term goals.

Now, back to the present…

First, let’s wrap our collective brain around what we do know. Start with oil price angles; specifically, a chart of the price of West Texas Intermediate (WTI) crude oil over the past three years.

I’m using WTI because it’s the main North American benchmark for oil prices; by extension, it the price control for refined fuel prices in the U.S. and Canada. If you live in the U.S. or Canada, this is your world…

Chart

As the chart shows, WTI prices rose from 2017 to the summer of 2018. Then WTI prices crashed down in late 2018, and recovered into mid-2019. WTI has drifted down in price since late spring.

After the attack on the Saudi oil installations, though, WTI prices immediately spiked back up.

All in all, though, and despite the attack on Saudi, WTI remains less expensive than it was just over a year ago in August 2018.

In other words, North American oil prices have been declining for a year. Despite the uptick after the Saudi attack, oil prices remain in a general down trend.

Near-term, we might see a slight bump in oil prices based on the attack; but unless something else happens – and it’s bad – we won’t see a big hit. Based on quick repairs to Saudi facilities, oil is again flowing. Global oil prices will moderate. The price shock at the pump won’t be as bad as it could have been.

Per news accounts (see above), Saudi Aramco will be back in trim by early October, and exporting at full capacity by November. All of this will be just in time for winter in the Northern Hemisphere.

Good news! We won’t freeze to death in the dark this coming winter. But don’t get too comfortable. The Saudi attack is the beginning of a new game in many ways…

Quick repairs or not, the world’s energy supply remains at risk. We’ve known that for a long time, but now the point has been made kinetically.

Cruise missile tech is over 40 years old; drone tech is 20 years old and more. But with the recent attack on Saudi, it’s all actually sinking in. We’re in a new age of economic terrorism, if not a new approach to economic warfare.

In Saudi, “somebody” effectively shut down a very big, economically significant oil target using about 20 small drones and 9 cruise missiles.

Clearly, the world took notice. Oil markets went nuts on the first trading day after the event.

Meanwhile, the attacks on Saudi facilities were carefully planned and well-executed. Photos show precise impact points that are a credit to whomever picked aim points and target coordinates.

Targeting

Professional respect to the targeting guys.

Post-attack imagery shows several burnt areas from oil fires. But quite a bit of the damaged infrastructure is not burnt. Evidently, attackers hit more than a few empty tanks.

In fact, much of the fire and smoke in the early imagery from the attack site was caused by an oily settlement pond that caught fire; not so much from damaged equipment or storage tanks.

The attack required careful planning, certainly with respect to targeting and hitting Saudi’s oil processing facilities.

Yet, it seems odd that nobody on the ground was harmed; those kinds of facilities are usually staffed 24/7.

And for all the effort to stage an attack, damage will be repaired soon. Full oil production will be restored in a month or so.

Is this a victory for the attackers? Or a strategic defeat; a modern version of Ploesti, without the heavy losses and casualties?

Here’s what the facts indicate…

The attack on Saudi facilities was thoughtful, deliberate and quite focused. Aerial weapons hit certain targets to cause damage, but also to minimize casualties. Damage was exact; but it can be repaired relatively fast.

Obviously, somebody knew where to aim.

Now, with fast repairs, world oil markets will experience little long-term impact on cumulative output or supply and availability. We won’t see long-term high prices that would choke the world economy.

Here are a few strategic implications:

  • A prompt (if not rash) Saudi and/or U.S. response could have led to war with Iran. That didn’t happen; not yet.
  • The “bombers got through,” to paraphrase Britain’s Stanley Baldwin of the 1930s. And the military side of Saudi – especially its lavishly-funded air defense forces – were embarrassed, if not humiliated.
  • Related to the foregoing, the overwhelming success of the attack on oil facilities was not exactly the “finest hour” for U.S. and other nations’ expensive weaponry in the hands of Saudi operators.
  • Global oil markets received a jolting message to attach a “war risk” premium to every future barrel of oil. The attack on Saudi tells us that oil markets are just a few drone-strikes away from true, effective scarcity.
  • There’s plenty of room in all this to compose “False Flag” scenarios, in which any of numerous players could have set the whole episode up. Because definitely… this was a setup… or “an op” if you get my drift.

Global energy supply is in play. We’re in early innings. Stand by for more excitement…

On that note, I rest my case.

That’s all for now…  Thank you for subscribing and reading.

Best wishes,

Byron King

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

1 Saudi officials see early supply recovery, Oil & Gas Journal
2 Aramco CEO: Saudi Aramco rapidly restores production capacity, expects stabilization of global supply

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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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