Home America Now Pain at the Pump: Will Conflict in the Middle East Drive Oil Prices Skyward?

Pain at the Pump: Will Conflict in the Middle East Drive Oil Prices Skyward?

by Richard A Reagan

The recent drone attack on Saudi Aramco’s facilities in Saudi Arabia was a major shock to the world, and to oil markets. The simplicity of the attack was unexpected, as was the audacity. A relatively minor attack, with no involvement of actual people attacking, was able to cut Saudi oil production in half nearly instantaneously. Does this signal the beginning of a series of strikes against Saudi infrastructure and, if so, what effects might that have in the future?

Both Saudi Arabia and the United States were quick to blame Iran for the attack, even though Yemeni Houthi rebels claimed responsibility. Regardless of who is actually to blame, the US is looking for an opportunity to attack Iran, and this drone attack provides a great pretext. In the event that the US were to attack Iran, expect even more disruption to world oil supplies and significant oil price hikes.

That would be good news for many in the US oil industry, particularly producers of shale oil. With so many producers having been dependent on cheap debt to keep their businesses afloat, higher oil prices will keep them operational longer. Just how long is unknown, but it costs the average shale oil producer nearly $50 to produce a barrel of oil. If prices drop into the low $50 range then many marginal producers will slow or stop production, or even go out of business.

While oil prices spiked in the immediate aftermath of the attack on Saudi Aramco, they have since fallen back after Saudi Arabia announced that oil production would be back online quicker than anticipated. It would stand to reason, then, that it would require a much larger attack that does much more damage to cause higher and longer-term rises in the oil price. US consumers should hope that that doesn’t happen but, given the ongoing tension in the Middle East, the likelihood of such an attack can’t be ruled out.

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