Logo of Phnom Penh Post newspaper Phnom Penh Post - Despite Saudi turmoil, new oil shock unlikely

Despite Saudi turmoil, new oil shock unlikely

Content image - Phnom Penh Post
A devastating attack on Saudi oil infrastructure, including the Abqaiq oil processing plant pictured here, briefly sent oil prices soaring. FAYEZ NURELDINE/AFP

Despite Saudi turmoil, new oil shock unlikely

The past week’s sudden surge in oil prices brought to mind the nightmare of shortages, but it’s not too likely motorists will be queuing to fill up around the world, analysts say.

All it took was a September 14 strike on key oil infrastructure in Saudi Arabia to abruptly leave the world’s main supplier producing just half its normal amount.

That sent the price of Brent crude flying 15 per cent higher in a single day.

The price on a barrel of crude has come back down since then and by Friday was trading around $65.

Given the slowdown in the global economy and the abundance of crude produced worldwide, the prospect of a $100 barrel, for now, doesn’t look too likely.

“In essence, the world is far better equipped to handle oil shocks than it was in the ‘70s”, explained Harry Tchilinguirian, the head of commodity research at BNP Paribas.

In 1973, after an embargo by the Organisation of the Petroleum Exporting Countries against Israel’s allies in the midst of the Yom Kippur War, and in 1979, after the Iranian revolution, crude oil prices soared in just a few months, bringing developed economies to their knees.

Reduced dependence

“Currently, an oil shock would hardly have the same devastating effects” because countries grew accustomed to such events, economists at Commerzbank said in a note.

On top of that, “central banks would not react to a supply shock with massive interest rate hikes to combat rising inflation”, they said.

Most importantly, however, economies have reduced their dependence on oil.

Consumption in the US, for example, rose from 17.3 million barrels per day (mbd) in 1973 to 20.5 mbd last year, an increase of only 18 per cent even as the country’s real gross domestic product jumped 230 per cent.

In Germany, households spent only 2.6 per cent of their budget on fuel last year.

Many economies have taken strides away from heavy oil consumption, thanks to transport and energy-efficient industries, and alternative sources such as natural gas or renewable energy.

When oil prices held well above $100 a barrel between 2011 and 2014, it did not lead to economic collapse. The world has also now become less dependent on a few huge producers.

The first oil crisis led to the creation in 1974 of the International Energy Agency, which requires Organisation for Economic Cooperation and Development countries to keep in reserve the equivalent of at least 90 days of their net imports of crude.

On top of that, oil production has branched far beyond the Middle East, said Tchilinguirian, referring to North Sea oil exploited since the 1980s, deep-sea exploitation off the coast of West Africa and Brazil, and the oil sands of Canada.

The US, long deeply dependent upon imports, has become a major producer and exporter thanks to shale oil and new technologies.

Such factors help smooth things out in the event of a major disruption like the attack on Saudi facilities.

As such, a country like Saudi Arabia would probably no longer decide to voluntarily suspend its exports “because it could lose its status as a reliable supplier”, says Alan Gelder, refined products specialist for Wood Mackenzie.

Even if an oil shock is unlikely, “you can never say there is zero risk”, said Andrew Lebow, oil market specialist for Commodity Research Group.

“Especially”, he added, “if there is a major war that closes the Strait of Hormuz”, which a third of all petroleum products shipped by sea pass through.

The effects of a possible oil shock, however, “should not be underestimated”, the Commerzbank economists warned.

“Many economies are currently struggling with problems anyway and the central banks have little room for manoeuvre . . . to help the affected economies,” they said.

MOST VIEWED

  • With herd immunity likely in 2022, is Cambodia ready to reopen for tourism?

    The government aims to inoculate 80 per cent of the target population by June next year, giving it a head start among regional peers to reboot the sector but first, it has to do a few things to up its game A sign on a glass

  • Quarantine still a must for all arrivals, in next Covid chapter

    Since early May, an average of five to 10 Cambodian people have died from Covid-19 a day with many others testing positive amid the ongoing community outbreak. At the same time, however, hundreds of patients also recovered a day. The first Covid-19 case in Cambodia was

  • US wants 'full access' to Ream Naval Base

    On June 11, the US embassy's Defense Attaché Colonel Marcus M Ferrara visited Ream Nava Base in coordination with Cambodian officials following the recent approval of Prime minister Hun Sen to allay the concerns on Chinese military presence at the base as raised by US Deputy

  • Jab drive heading to 5 provinces

    The government is set to vaccinate more than 1.2 million people in five provinces after finishing with Phnom Penh and neighbouring Kandal in an ongoing campaign administered by the ministries of Health and National Defence. The five provinces are Preah Sihanouk, Kampong Speu, Takeo, Kampong Cham

  • New immigration bill targets illegal foreigners in Kingdom

    General Department of Immigration (GDI) officials are discussing revisions to the new draft law on immigration to prevent foreigners from entering Cambodia illegally and to supervise those living in the Kingdom more effectively. The revisions draw wide support among civil society organisations. GDI director-general Kirth

  • Kingdom set to be a gold producer

    Cambodia will soon join the roster of gold producing countries after the government announced the commencement of commercial gold mining operations in the Okvau area in southwestern Mondulkiri province's Keo Seima district from June 21. Prime Minister Hun Sen on June 10 announced that after 14 years of