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Saudi oil production disruption could cost RI $3.1 billion
ReutersA disruption cutting global oil supply by more than 5 percent is not just a worst-case scenario after Saudi Arabia announced that 50 percent of its oil production capacity had gone offline after a series of drone attacks last weekend
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Reuters
A disruption cutting global oil supply by more than 5 percent is not just a worst-case scenario after Saudi Arabia announced that 50 percent of its oil production capacity had gone offline after a series of drone attacks last weekend.
The attacks crippled an oil facility in Abqaiq that produces 7 percent of the global oil supply and the Khurais field that produces 1 percent of the global oil supply. The magnitude of the disruption is even worse than the effect of Iraq’s invasion of Kuwait or the Iranian Revolution.
While the attack has caused a major disruption to the global oil supply, it was not the first time that oil facilities have been targeted in recent months. Earlier this year, several oil tankers in the Gulf were sabotaged. The attacks showed a major geopolitical crisis was brewing in the region.
Moreover, Saudi Arabia also faces security and political problems in the restive Eastern Province, where Shiites form a majority and where discontent against the Saudi state has been brewing for years. Unfortunately for the world, Saudi Arabia, especially the Eastern Province, produces 12 percent of global oil supply, making the country a critical link in the global oil supply.
The risk is even higher when considering the possibility of a major confrontation between Saudi Arabia and its allies and Iran. A major geopolitical crisis in the Gulf region could affect 33.4 percent of global oil supply. While we are praying that a confrontation can be avoided, the disruption would be costly for Indonesia.
If the disruption lasts to the end of this year, it will cost Indonesia between US$1.1 trillion and $3.1 trillion in oil imports. Additionally, oil subsidies will increase between Rp 1.9 trillion ($135 million) and Rp 5.1 trillion.
This depends on how much time the Saudi national oil company Aramco needs to resume production and how the Organization of Petroleum Exporting Countries (OPEC) will respond. If Aramco needs at least a month to restore production capacity and OPEC fails to agree to increase its production quota, there will be a monthly oil supply deficit of 150 million barrels, which could drive oil prices up to $100 per barrel.
Oil experts differ in their assessment of the effect on global oil prices. Optimistic experts predict the disruption will only cause the oil price to rise less than $12 from last Friday’s market closing price in the short term.
More pessimistic experts predict the oil price will soar by $40. After the opening of the market on Monday, oil prices surged by 12 percent, but the increase was limited by United States President Donald Trump’s order to release US Strategic Petroleum Reserve supplies to stabilize the oil price.
What the effect will be depends on how fast the global market finds replacements for the lost supply. Where will the global market find a replacement for the 5 million barrels of oil taken out of the market every day? Generally, the market is oversupplied and could find replacements quickly if there is political will both among OPEC leaders and the US.
OPEC member countries control 40 percent of global production, while the US has become the largest oil producer, supplying 15 percent of global demand. As of mid-2019, US production was around 12 million barrels per day but could increase to 15 million barrels per day.
As of today, Aramco is still silent on the extent of the damage, but Reuters cited a source from inside the company that it will take weeks until the situation returns to normal. Nevertheless, the attack will increase the risk premium in the oil market and possibly will boost the price moderately in the medium term.
Indonesian oil imports have increased since 2000, reaching around 50 million tons in 2017. Luckily, most of the imports come from Southeast Asian countries, such as Malaysia, Brunei Darussalam and Thailand.
Imports from the Gulf countries have stagnated below 10 million barrels. In 2017, oil imports from the Gulf countries amounted to only 18.54 percent of total oil imports, of which 10.89 percent came from Saudi Arabia.
In 2017, Indonesia spent $24 billion on oil imports. Imports from the Gulf countries cost $4 billion. In assessing possible effects on Indonesia, we can use two scenarios. The first scenario is the worst-case scenario in which the oil price jumps 75 percent from the highest price of Arab Extra Light in 2017 to $100 per barrel.
The second scenario uses a moderate prediction with the oil price rising 28 percent from the highest price of Arab Extra Light in 2017 to $73 per barrel. For our scenarios we assume that the disruption will last until the end of 2019, that Indonesian oil imports are at the same level as 2017, and that the price of oil from the Gulf countries will also rise to the same extent as Saudi Arabia’s oil price.
In scenario one, the rise in the oil price to $100 per barrel would increase Indonesia’s spending on oil imports by 13.02 percent. This means Indonesia would need an extra $3.1 billion for oil imports. Oil subsidies would also increase by Rp 5.1 trillion. In scenario two, the rise in the oil price to $73 per barrel would increase Indonesia’s spending on oil imports by 4.84 percent. This means Indonesia would need an extra $1.1 billion for oil imports. Oil subsidies would increase by Rp 1.9 trillion. Both scenarios overestimate the effect of the disruption.
The real effect on Indonesia would most likely be below both scenarios. Nevertheless, the effect could worsen if the geopolitical situation in the Middle East deteriorated and disruption to global oil supply became the new normal. In any case, Indonesia needs to find an alternative to oil imports, otherwise it will need to dig deeper into its budget to satisfy the nation’s thirst for oil.
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Analyst at Brower Group Asia-Indonesia, focusing on information and communication technology, energy, mining and manufacturing and former executive assistant to State Secretariat minister. He obtained a masters degree in public administration from the School of International and Public Affairs, Columbia University, New York.
