Even with the weekend drone attack on a major oil refinery in Saudi Arabia, we weren’t too worried until Trump Tweeted this:
Which had been preceded by just a few minutes by this:
So now it all may come down to what Trump means by “locked and loaded”, and who exactly he’s threatening. (And also a general—and we think fair—characterization that when Trump says everything’s great IN ALL CAPS, it probably isn’t). Also, since when does the U.S. wait until “the Kingdom” tells us “under what terms we would proceed”? Can the Saudi’s not do a counter-strike on their own, if that’s what they want to do? They’ve got all this military equipment the U.S. sold them.
Houthi rebels in Yemen took credit for the weekend drone attack, which effectively knocked out 6% of the world’s oil supply. Iran supports those rebels in Yemen, although the Iranian government denied any direct involvement in the attack. Saudi TV says no workers were killed in the attack.
The attack also deeply embarrassed the Saudis who are currently trying to sell shares in their giant national oil company to global investors. We think this part of the story is being significantly under-reported, especially since just a couple of days ago, Saudi Arabia replaced its oil minister and Chairman of the Saudi national oil company, Aramco, with the half-brother, and a close friend of Crown Prince Mohammad bin Salman, respectively. In order to pull off the public offering of stock, Aramco has also been looking for ways to get oil in the $60-70 barrel range, instead of $50-60, where it’s been for a while.
So this is a real test for Trump, especially since the President has proven himself to be very sensitive to changes in the price of gas at the pump, often giving himself credit for low gas prices. And sudden military action (or even the threat of it), certainly isn’t going to help with that. It’s something that really has to be handled pretty delicately, and even if you feel Trump has some strengths on the world stage, you’ve got to agree he doesn’t do “delicate”.
Still, he was unusually coy in his Tweet; not directly naming a culprit, even though his own Secretary of State, Mike Pompeo called out Iran by name almost immediately following the attack. (Also, the last time we remember the President Tweeting the phrase “locked and loaded“, it was aimed at North Korea and Kim Jong-un, which ended in a cordial relationship. But the players are different here, with very different objectives).
Since the attacks took place over the weekend, oil markets hadn’t really had a chance to react until this morning. At time of publication of this newsletter, global crude oil prices are way up and swinging wildly. The price of a barrel of the most commonly traded type of oil soaring close to 20%, the biggest one day surge ever, putting a barrel of oil well above $70 at one point, before settling for a bit to a gain of 10%, on absence of additional news. But on any “normal” day, that’d be huge in itself. Although U.S. markets haven’t opened yet, West Texas Crude is up about 10%.
According to the AAA, the nationwide average for a gallon of regular gas right now is $2.56. So even though crude and unleaded gas prices don’t always run exactly in parallel, and there are a lot of other factors that go into pricing, let’s do our own unscientific guesstimate: tack on 10% or maybe a little more, and you’re perhaps looking at something close to $3.00 a gallon in the near future.
The President Tweeted that he’d tap into the U.S. Strategic Petroleum Reserve if needed to lessen any impact. But mostly that just sounds good. That reserve would only last for about a month without replenishment or severe rationing (neither of which we expect). So as we said, that’s mainly just for show for now.
Saudis say they will have the attacked plant up and running again by today at 1/3 to 1/2 capacity, and will mitigate the impact by filling orders with supplies it already has sitting around elsewhere, which it will then slowly replenish, thus mitigating the harm to world markets. Officials promised an announcement sometime tomorrow on their progress. That could make all the difference to financial markets, and gas prices.
Beyond the immediate impact, and imminent consequences, there are quite a few decisive factors that will determine how big an impact all this will have on the everyday lives of Americans:
Things that could make everyday-life-in-the-U.S.-impact not-so-bad:
- The U.S. is currently the U.S.’ biggest oil supplier, and the biggest oil producer in the world (Saudi Arabia is 3rd, after Russia). The U.S. is more self-sufficient energy-wise than at any time in more than half a century. Which is good, because Americans are by far the world’s biggest consumers of oil: bigger than all of the European Union combined; nearly 70% more than China.
- Canada is America’s next biggest source of oil, not Saudi Arabia. And Mexico’s right up there. So the U.S. is surrounded by very reliable sources. (We used to get a lot of oil from Venezuela too which is geographically close; we don’t anymore, so that maybe adds a little risk down the road, but not much.)
- The strong dollar Trump keeps complaining about is a plus for him now because barrels of oil are generally bought and sold in U.S. dollars no matter where in the world you go to buy them. Also, the fact that the global economy is cooling could reduce the financial impact, since that’s keeping a lid on demand.
- Diplomacy. Fast tracking talks with Iran. Trump and Iran’s leader will be in New York next week for the United Nations General Assembly, but each denies he will meet with the other. At the same time, Trump has kind of been itching to do anyway, let’s face it.
Things that could make everyday-life-in-the-U.S. impact a lot worse:
- If oil prices start going up a lot, it could slow the U.S. economy. Because one of the first things managers often do when faced with higher and unpredictable energy costs, is scale back expansion, and hiring.
- More attacks on Saudi oil facilities, tankers, U.S. forces in the Mideast, etc. Bloomberg points out that the weekend attacks knocked out more in terms of barrels of oil than either Saddam Hussein’s invasion of Kuwait in 1990 or the Iranian Revolution in 1979.
- Any type of retaliatory military action that might lead to war. Uncertainty and rising tensions never lead to stable prices.
When you buy a gallon of gas, you’re not always just buying a gallon of gas; in times of turmoil, you’re also paying for the uncertainty of future supplies. So if it looks like these drone attacks weren’t just a one time thing, or somebody’s headed to war with someone, prices absolutely could spike. Not so much because there’s a threat of a shortage immediately, but due to a lack of visibility about the future.
So by all means, fill up that tank today, and take public transportation or carpool to work for a few days if you can, until we all get a better read on where this is headed. Why not? Gas prices are definitely going to go up. There’s no question about that. How much and for how long, and at what cost (and we don’t just mean money), won’t be clear for a while.