On September 14, 2019, the Houthi Movement in Yemen used drones to attack a Saudi oil processing facility in Abqaiq, Saudi Arabia, severely crippling Saudi oil production. Since Saudi Arabia is responsible for ten percent of the world’s oil production, this attack has the potential to cut off a sizeable proportion of the world’s supply and causing a shortage of refined oil in the global market.
Looking at a supply and demand curve for oil, this shortage of oil would represent a leftward shift of the supply curve, raising the equilibrium price of oil, assuming demand remains unchanged. This is evident in the real-world price-changes of oil, as before the attacks, oil prices averaged around $58 a barrel, which has since jumped to $63 a barrel.
However, this shortage comes at a fortunate time for the American oil market. Since the Arab Oil Crisis of the 1970s, American oil production had generally been on the decline, as America became more dependent on foreign imports for oil. This was until the late 2000s when America began ramping up oil production. Currently, American oil production is at an all-time high and even grew 17 percent in 2018. This means that, especially in comparison to the past decade, America is less reliant on foreign oil imports than in the past.
Furthermore, the market is nowhere near running out of oil. According to Manish Raj, an executive at a large oil drilling enterprise, Saudi Arabia has enough barrels of oil stockpiled for two months of exports. Furthermore, the United States has over 700 million barrels of oil stockpiled in the Strategic Petroleum Reserve, which was created during the Arab Oil Embargo of the 1970s, which skyrocketed American oil prices. America has seldom had to draw on this reserve, only during the Gulf War, Hurricane Katrina, and during the Arab Spring Revolts of 2011. President Trump has authorized the use of said oil reserves if need be, hampering any significant damage the Saudi oil shortage will cause to American markets.
Sources:
https://www.nytimes.com/2019/09/15/business/saudi-arabia-oil-energy-prices.html
https://www.eia.gov/todayinenergy/detail.php?id=38992
https://www.npr.org/2019/09/16/761118726/oil-prices-jump-following-drone-attack-on-saudi-oil-facility
I had no idea how far America developed with their oil production and how they were becoming less reliable on foreign imports for oil. Although, with how technology is advancing and the awareness of keeping our environment clean and healthy is rising, we might not have that high of a demand for oils in the future.
ReplyDeleteIt's obviously good that the US has reserves, but the point of reserves is not to have to use them, and they only really provide a temporary solution. So while reserves are helpful, we shouldn't use them lightly. Also, the attacks on the Saudi Arabian oil production are bad for more reasons than just a decline in production. The drone strike is a pretty clear indicator of unrest in the middle east. Instability and the political conflicts were the result of the attacks, and it's hard to believe that Iran would just be content with leaving the attacks as a standalone event. It seems to me like there will be a likely continuation of conflict that continues to drive up costs. It's really good that the US is becoming more reliant on itself, but it looks to me like we could face some serious economic struggles if we don't make that shift quickly.
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