Oil Crisis 2019

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Context: Tensions in the Middle East have escalated following drone attacks on two major oil facilities in Saudi Arabia. 

Relevance: 
Prelimns: Current events of national and international importance. 
Mains: GS II 

Contribution of Saudi Arabia in Oil supplies: 

  • The proven oil reserves in Saudi Arabia are the second largest in the world, accounting for about 16% of the world's supply and ranking second only to Venezuela, and Saudi Arabia is the world's largest oil exporter. The country produces about 12 million barrels of petroleum products per day, as of 2017. The oil and gas sector accounts for about 50 percent of gross domestic product, and about 70 percent of export earnings.
  • As the world’s largest oil producer, Saudi Arabia accounts for nearly 10 million barrels of crude production per day, which is 10% of the global output.
  • Between 1988 and 2009, Riyadh had built five giant underground storage facilities across the country to be used during crises.

Saudi's Crude Oil Imports to India: 

India imports nearly 83% of the oil it consumes, making it one of the biggest importers of oil in the world. Most of its crude oil and cooking gas comes from Iraq and Saudi Arabia. It used to import more than 10% of its oil from Iran. However, earlier this year, the US pressured India to stop buying Iranian oil after walking out of the nuclear deal. India also imports from other countries like the US, but at a higher cost.

 

 

Drone attacks:

Saudi Aramco is a national oil company owned by the Saudi Arabian government; it is the second-largest oil producer in the world, behind Russia's Rosneft. Aramco operates several oil drilling, transport, and production facilities across Saudi Arabia. Saudi Aramco, officially the Saudi Arabian Oil Company, is a Saudi Arabian national petroleum and natural gas company based in Dhahran, Saudi Arabia. It is one of the largest companies in the world by revenue. 

The major oil processing plants are owned by Aramco. The drone strikes on 14th September 2019 on the national energy giant Aramco’s processing plants in Abqaiq and Khurais knocked 5.7 million barrels per day (bpd) off production, close to 6% of the global crude oil supplies.

The Abqaiq facility is described by Aramco as “the largest crude oil stabilization plant in the world”; it converts sour crude into sweet crude oil by removing sulfur impurities before it is transported to downstream refineries, processing upwards of 7 million barrels of oil per day or about 7% of global oil production.

 

 

Responsibility of the attacks: 

  • Yemen's Houthi rebels, who have been locked in a war with a Saudi-UAE-led coalition since 2015, claimed responsibility for the attacks, warning Saudi Arabia that their targets will keep expanding. Houthi rebels are trying various tactics to invite international pressure on Saudi Arabia as it will not be able to supply crude oil enough to meet international demand.
  • Saudi Arabia has led a coalition against the Houthis after their overthrow of the recognized government led by President Abdrabbuh Mansur Hadi. The coalition has led a blockade of Yemen, denying the country of critical supplies and leading to a famine and a humanitarian crisis that, as of 2019, is described as the worst in the world. Thousands of Yemeni civilians have been killed during the conflict, mostly by coalition airstrikes in Yemen.
  • The Houthis have asserted that the attacks on the Aramco facilities are their right in retaliation for airstrikes and other attacks in Yemen from the coalition. In the weeks prior, there had been similar drone attacks on the Saudi Arabian oil infrastructure, but without significant damage or impact.

Countries like Russia may take advantage of the situation by fulfilling the demand for crude oil in the international market. 

Impact on the World Market: 

The attack cut 5.7 million barrels per day (bpd) of Saudi crude output, over 5 percent of the world's supply. But the attack also constrained Saudi Arabia's ability to use the more than two million bpd of spare oil production capacity it held for emergencies. The kingdom has for years been the only major oil-producing country that has kept significant spare capacity that it could start up quickly to compensate for any deficiency in supply caused by war or natural disaster.
Most other countries cannot afford to drill expensive wells and install infrastructure, then maintain it idle.

  • Before the attack, the Organisation of the Petroleum Exporting Countries (Opec) global supply cushion was just over 3.21 million bpd, according to the International Energy Agency (IEA).
  • Saudi Arabia – the de facto leader of Opec – had 2.27 million bpd of that capacity. That leaves around 940,000 bpd of spare capacity, mostly held by Kuwait and the United Arab Emirates.
  • Iraq and Angola also have some spare capacity. They may now bring that production online to help plug some of the gaps left by Saudi Arabia – but it won't be enough.
  • Opec and its allies such as Russia have cut output to prevent prices from weakening because the market has been oversupplied. Those cuts aimed to reduce supply by 1.2 million bpd. But much of that was from Saudi Arabia so it now cannot be reversed quickly. Non-Opec members such as Russia are pumping near capacity, with perhaps only 100,000-150,000 bpd of available additional production.
  • Iran holds spare capacity but it cannot get the oil to market because of sanctions imposed by the government of the United States.
  • If the Saudi outage looks like it will be prolonged and oil prices rally significantly, then shale producers from the United States may raise output. But even if shale producers pump more, there are constraints on how much the US can export because oil ports are already near capacity.
  • Oil from storage should keep the market supplied for some time, but oil markets will likely become increasingly volatile as storage is run down and the possibility of a supply crunch rises.

Impact on India:

Data from the oil ministry's Petroleum Planning and Analysis (PPAC) shows that India's dependence on oil has increased gradually since 2017. In 2018-19, India's oil consumption increased to 211.6 million tonnes.
On the contrary, India's domestic crude output continues to fall. Crude output dropped from 36.9 million tonnes in 2015-16 to 36 million tonnes in 2016-17. By FY19, India's crude output fell to 34.2 million.

  • India is heavily dependent on Saudi Arabia to meet its energy requirements. For several years, Saudi Arabia has been the largest supplier of crude oil to India. Though it was briefly overtaken by Iraq as the largest source of crude oil for India but, it remains the largest crude oil supplier for the country. India viewed Saudi Arabia as amongst the safest suppliers in the world.
  • A lot would now depend on how Saudi Arabia responds to the attack – any military action would lead to an escalation in the region, which could then disrupt supplies from the entire Gulf region.
  • A longer delay in repair of the oil facilities by Saudi Arabia will have a further impact on the price of oil and that could cause India's import costs to go up.
  • The Indian government is already stretched financially and so higher costs mean it has less cash with which to effectively tackle its economic slowdown.
  • The price of petrol and diesel could rise if crude prices globally continue to rise. Every one dollar increase in the price of oil raises India's import bill by $1.5bn every year. In 2018-19, India spent $111.9 billion on oil imports.
  • It would also affect many industries, including manufacturing and aviation, and can accelerate inflation. By-products of crude oil are also used in the production of items like plastic and tyres, which may become more expensive.

 



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