UNIDENTIFIED PERSON: NPR.
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CARDIFF GARCIA, HOST:
Hey, everyone. This is THE INDICATOR FROM PLANET MONEY. I'm Cardiff Garcia. Over the weekend, an oil processing facility in Saudi Arabia and a separate oil field in Saudi Arabia were attacked from the air. The damage was severe enough that Saudi Arabia has now suspended about half of its daily oil production, and that's a big deal because that represents about 5% of the global oil supply that just got shut down.
Immediately after the attacks, the price of oil jumped. And as of this afternoon, it was still almost 13% higher than it was before the attack. That's what happens, of course. When supply of something suddenly goes down, its price goes up because there is less of it. It's more precious. And if that higher price lasts, then eventually, people will feel it because the price of gas, for example, might be higher, or your energy, your heating bill might be higher. And eventually, that will take its toll on the economy. But will that higher price last? And more fundamentally, what does the attack mean for the future of the global oil market and for the global economy?
We're going to speak about all that today with John Kemp. He's a senior market analyst at Reuters. He's been on the show before, and he happens to be our favorite oil and energy markets wonk, or expert. And he's going to tell us what we know, what we don't know and what to look for. All that is coming up right after the break.
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GARCIA: John Kemp, welcome back to the show.
JOHN KEMP: Hi, Cardiff.
GARCIA: It seems like we always speak with you when something's gone wrong with the oil market. I promise we'll have you on the show at some point soon when something is going really well. How about that?
KEMP: I look forward to it very much.
GARCIA: So John, let's start with this. Saudi Arabia has now suspended half of its daily oil production. And so my first question is, does the rest of the world have the ability to replace that lost production? And I'm thinking, for example, of, like, the other countries in the OPEC cartel that Saudi Arabia is a member of or maybe the countries, like the United States, that are members of the IAEA, the International Energy Agency. Can all these countries produce enough oil to offset the loss of Saudi production?
KEMP: No. The short answer is, no, it doesn't in - not all sort of 5, 6 million barrels a day that have been lost. But there are a couple of points. The first is, there is plenty of oil in stock. The Saudis hold considerable inventories themselves. All the global refiners hold inventories, so we could draw down some of that. In addition, the United States and the other members of the IEA all hold emergency stockpiles, and the White House has already indicated that it will release some of those, if necessary. So that would take us over any sort of short-term decline in Saudi output. So the total shortfall might end up being considerably less than 6 million barrels a day.
GARCIA: John, you wrote a column about the attack this morning and, kind of intriguingly, you were not at all surprised by it. You had noted that there was a security risk to these facilities in Saudi Arabia before. What was your reaction when you found out about the attacks?
KEMP: I don't think it was particularly surprising in the sense that Abqaiq, which is the processing facility that was hit, has always been the No. 1 target in the oil market. Oil fields don't actually make a particularly attractive target for terrorists or any other armed group. The oil wells are too dispersed. It's quite difficult to cause significant damage.
But the oil fields all feed their initial production into this centralized processing facility at Abqaiq, where some of the gas is removed from it, where some of the sulfur is taken out. And that means it's a bit of a central node. It handles, as you pointed out, about half of all Saudi Arabia's crude oil production - goes through that one processing facility. And that means that it's very much, if you like, the chokepoint in the system, which makes it a very attractive target for anyone who wants to disrupt Saudi Arabia's exports.
As I say, it's probably one of the most vulnerable facilities on the planet. It's extremely heavily protected. There are armed guards. There are air defenses, et cetera, deployed around it. So it's not surprising that it was targeted. What I think people are surprised about is that the attack succeeded.
GARCIA: John, does an attack like this change something fundamental about how we understand the oil market? I mean, does it mean that we have to be more worried about the security of this market in the future?
KEMP: Yeah, absolutely. I mean, this was, I think, what - people had always sort of categorized this as what you might call a high-consequence, low-probability event. So an attack on Abqaiq could be catastrophic, but most people thought that the probability of it succeeding was very, very low.
Now, of course, we know that perhaps the probability of it succeeding is much higher. And of course, if it can be attacked once, it can be attacked again, which makes it quite vulnerable. I do think that the attack at the weekend does take us into a very different kind of world. And it shows us that, actually, the risk to global oil supply was much higher than we thought.
GARCIA: John, we still don't know exactly who is responsible for this attack. The Houthi rebels, which is an insurgent movement in Yemen that is backed by Iran - they've claimed credit. The U.S. government is suggesting, though, that perhaps the attack was carried out by Iran directly. This is all a bit vague at the moment. But given the geopolitical tensions between the U.S. and Iran that already existed, what could be the consequences if Iran is ultimately blamed for the attack?
KEMP: If Iran is held formally responsible, that will raise the question about whether or not there should be some form of response, some form of retaliation. And I think at the moment, most people are unwilling to go that far. They're waiting for a decision to be made in Riyadh and, indeed, in the White House. The key question, I think, for the White House as it evaluates sort of potential military responses is to anticipate, you know, how Iran might then respond to any U.S. attack.
One of the things that I think makes policymakers particularly nervous is that if there is some sort of Iranian response, Abqaiq and the other oil field installations are probably likely to be Iran's top targets. They're very vulnerable. As we saw at the weekend, they can't really be defended against an aerial strike. And one of the dangers here is that if we do get into a sort of an escalatory spiral, you could see further missile attacks on Abqaiq, which could, you know - it could worsen the damage even further. And I think that's something that all sides will want to try to avoid.
GARCIA: Yeah. John, in terms of what this means for the U.S. economy, the effects of this attack might be actually kind of nuanced, right? I mean, the U.S., because of fracking, in roughly the last decade has become a huge oil producer itself, and so it's not clear whether higher oil prices will be good or bad for the U.S. economy. So what do you think about that - the effects on the U.S. economy of higher oil prices?
KEMP: It's - as you say, it's a more nuanced one than in the past. It will have a distribution effect. There's no doubt that this attack and the resulting increase in prices is probably actually very good for oil producers in Texas, New Mexico, North Dakota - will be beneficiaries of this. But for consumers, you know, this is unambiguously bad news. And of course, you know, that includes a lot of politically very sensitive swing states in the industrial Midwest.
So I think overall, the - both the economic and the political fallout from this are negative for the United States, although, you know, as I say, for certain U.S. oil producers, higher prices will be very welcome. I mean, they have been under tremendous pressure from this low-price environment and from overproduction globally. So this removes that overproduction and does throw them something of a lifeline. Overall, for the U.S. economy, I would say it's probably a small negative.
GARCIA: John Kemp, thanks so much for your time, man.
KEMP: Thanks, Cardiff.
GARCIA: This episode of THE INDICATOR was produced by Darius Rafieyan, fact-checked by Nadia Lewis (ph), edited by Paddy Hirsch. And THE INDICATOR is a production of NPR.
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