Saudi Oil Supply Disruption and Its Impact
In previous Oil Checks, we floated the likelihood that the price of oil would rise this summer. Several circumstances, from dipping demand in global shipping and manufacturing sectors, to ever increasing U.S. production, kept gas from becoming overly expensive. Now that the summer driving season is coming to a close, tensions in one of the major oil–producing regions has boiled up to the point of conflict. Let’s take a look at what that means for prices at home.
Saudi Arabia Oil Supply Disruption
Over the weekend of 9/14, drone strikes on Saudi oil facilities temporarily crippled their infrastructure, taking as much as 5% of the global supply offline. While repairs were initially projected to take weeks, they may resume full production as soon as October. Unanticipated disruptions in supply, also referred to as supply shocks, usually result in higher prices at the pump. We caught a glimpse of that pattern early last week as the market reacted to the event. The result? The largest daily gain on crude oil in years, and higher gas prices.
Middle East Unrest
Saudi Arabia is only the latest in a line of major oil producers impacted by increasing geopolitical tensions. After the current U.S. administration pulled out of the Iran deal and several months of waivers ended, Iran’s oil supply has been essentially severed from the market. The attack on the Saudi production infrastructure could have far-reaching effects on oil prices. Should Saudi Arabia spin up production by their target of early October, that uptick in prices will level off quickly. Say the fix takes longer? It may lead to prolonged supply outages and drive prices at the pump higher.
If geopolitical tensions continue to escalate in the Persian Gulf region, uncertainty around reliable, sustained production could lead to additional price spikes.
Back in Demand
With the oil supply disruption, U.S. produced oil has also seen an increase in price. This is due in part to the crude blend. Not all crude oil is the same; types with a lower sulfur content, commonly referred to as sweet crude oil, are desirable because they can be easily refined into fuel and other products. Since both Saudi Arabia and the U.S. produce sweet crude oil, demand for U.S. product is expected to increase. Oil producers in the U.S. have been ramping down production for more than one month, making it difficult for them to fill short-term supply gaps.
The Perfect Storm
It’s that time of year again. We’ve already seen two hurricanes devastating Central America and threatening both the south eastern U.S. and the Gulf of Mexico. Just one major storm could be enough to result in a second supply shock. Tropical Storm Imelda caused flooding and potential damage to Exxon Mobil’s refinery in Beaumont, TX last week, causing the facility to shut down. On a hopeful note, tropical storm activity normally slows as we exit peak hurricane season. That being said, tropical storms have hit the U.S. coasts as late as the end of November.
Taking A Different Path
Whether they’re worried about fluctuating gas prices or a more sustainable transportation option, some drivers are looking to get out of the gas price rat race entirely. The number of electric and hybrid vehicle sales in California rose 40% over the past year. While most vehicles in California are still gasoline powered, other options have become more viable. If gas prices continue to cause pain for the combustion engine crowd, they may drive even more people to the electric vehicle route.
Where do we go from here?
This could be the perfect time to wait and see. Predictions aren’t promises, as we’ve proved in previous posts about sky high summer gas prices. Things like dropping demand and drone strikes can wildly impact outcomes, well beyond the expected. No matter what happens, the best thing you can do is stay informed. Subscribe to our blog and keep an eye out for the next oil check!