Saudi oil drone strike: how will the attacks affect the rest of the world? – The Independent

The blow is stunning. The attacks on Saudi oil facilities have knocked out half of Saudi Arabia’s oil production. The kingdom is the world’s largest oil exporter. The state-owned company that produces the oil, Aramco, is probably the world’s most valuable enterprise. And oil provides one-third of the world’s primary energy.

It is hard to think through the global ramifications of an event such as this, because we know so little about the attack, about the likely political and military response to it, and about the practical implications for both Saudi Arabia, and more important, the world economy. But some points are already clear and it is worth setting them out.

For a start, a lot depends on how quickly production can be resumed. Assuming there are no further attacks, it should be possible to get some of the damage repaired reasonably swiftly – a matter of weeks. The oil fields themselves, including the giant Ghawar field, the world’s largest, are not touched. It is the processing plants that have been damaged. Further, this comes at a time where there is spare capacity in the oil market. Even if there weren’t, US shale production could be increased quite swiftly.

So while this is a shock to the oil market, and will for a while at least push up all energy prices worldwide, this is not a blow akin to the surge in oil prices in 2008, when oil touched $140 a barrel, or going back further, the oil shocks of the 1970s. We will all pay more to fill up our cars, but compared with what has happened in the past, this should be manageable.

The world economy is further helped by the fact that inflation is low, too low in some places, notably Europe, where the European Central Bank took steps to try to boost both inflation and overall demand. True, any disruption to the world economy is comes at a time when growth is faltering, but there are bigger problems notable trade frictions. If you look at the world economy as a whole, this is a middle-ranking issue, not a catastrophe.

What this does, however, is remind us of other fragilities.

First, the world is still very dependent on fossil fuels, and it will remain so for another generation at least. Oil has come down to one-third of primary energy from nearly half in the early 1970s, but the reliance on gas (which often comes from the same regions) has risen to one-quarter, so together they provide about 60 per cent of the world’s energy needs. (Coal provides about 25 per cent, with the whole range of renewables only 15 per cent.)

This dependence will decline, but the world’s population will continue to increase and the living standards of the emerging world will, we should all hope and expect, continue to rise. We should also hope and expect that coal’s share of global energy provision will continue to fall. Pull this together and it is clear that even a decarbonising world economy will need more oil and more gas over the next 30 years. A lot of that oil and gas will come from the Middle East.

Next, look at this from the perspective of Saudi Arabia. It is overly dependent on oil and gas, and has to diversify, as the Saudi Vision 2030 programme recognises. The plan has been criticised, and the task is huge. There is the basic question as to whether you can engineer a top-down diversification of an economy or whether you should allow market signals to show where competitive lies. But whatever your view, there is no question that this will cost a massive amount of money.

To finance this the kingdom aims to float part of its shareholding in Saudi Aramco, probably 5 per cent, on the world’s markets. There are all sorts of questions here, in particular about the governance of the company – there has been a boardroom shake-up. But the concerns are also partly about the inevitable political risks, and partly about the investor demand for energy companies in a world of shareholder resistance to such investment. These attacks could not, from the point of view of the sale of Aramco shares, have come at a worse time.

There is a narrow issue here, and a broader one. The narrow issue, being debated right now, by the bankers is what this means for the Aramco float: drop the price, postpone it, or what?