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Where does the world’s oil come from and what’s the impact of an attack in the Middle East? | Business News

By September 17, 2019 No Comments
The Houthi rebels have said they carried out the attack

The attack on Saudi Arabia’s largest petroleum-processing facility over the weekend struck at the heart of one of the most important oil-producing regions in the world: the Middle East.

As the former US ambassador to the United Arab Emirates Barbara A Leaf wrote on Twitter in the wake of the attack: “The US has an abiding interest in energy market stability. No true energy independence exists for any of us. All are linked. So an attack on Abqaiq and more than halving of Saudi production affects us all.”

Which region is the biggest producer?

At the heart of this world oil trade web is the Middle East, from which around 40% of all oil produced flows to the rest of the world, largely by sea.

Saudi Arabia’s main customers include Japan, South Korea, and China. India and Pakistan are also large importers of Middle Eastern oil.

Almost three quarters of state energy giant Saudi Aramco’s oil goes to Asia – meaning the region has the most to lose from any potential disruption to supply stemming from the recent attack.

The United Arab Emirates, Iraq, Kuwait, and Iran supply over 20% of the world’s crude oil.

These countries all have deep political and commercial ties with the Gulf region – strengthened in recent years through joint ventures and bilateral summits.

They are also all big consumers of petroleum products, making them eager customers for what the Gulf countries are selling.

Proximity may play a role too – Singapore is the nearest large energy hub to the Middle East, and serves much of South East Asia, making it easy for Gulf countries to export their oil throughout the region.

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Who else uses Middle Eastern oil?

The United States, a long-time trading partner and ally of Saudi Arabia, also continues to rely heavily on Saudi oil, despite soaring domestic production and its distance from the Middle East.

Even though imports from the kingdom have fallen sharply over the past decade as the US becomes more self-reliant, Saudi Arabia remains the second largest exporter of oil to the US, behind only Canada.

This has implications for California, in particular, due to its location and lack of pipeline connectivity to Texas, the huge state relies heavily on Saudi imports. Around 47% of what Saudi sends to the US goes to the West Coast, according to Reuters.

European countries, however, have historically been much more reliant on oil from local fields in the North Sea than the Middle East – shielding them from geopolitical turbulence and supply disruptions.

What about the UK?

Just 3% of the UK’s oil comes from Saudi Arabia: the majority comes via pipeline from Norway.

The US, Nigeria, Algeria and Russia are the other main suppliers to Britain.

Why is the Middle East so dominant?

Just under half of the world’s proven oil reserves are located in the Middle East, while around 40% of the world’s proven gas reserves are also located in the volatile region.

Saudi Arabia is the world’s largest oil exporter, shipping more than seven million barrels every day. It has around 18% of the world’s proven crude oil reserves.

Another factor that makes the Middle East so attractive is its prices: many of the cheapest places in the world to drill oil are located in the region, meaning prices can be kept low and highly competitive.

Image:
An oil tanker near the Persian Gulf

Which other regions are major producers?

Russia remains a significant producer, supplying around 11% of the world’s oil, while Canada also exports a large amount. The US continues to produce large amounts of oil, but much of it is consumed domestically rather than being exported.

Nigeria and Angola make up a further 7% of global exports.

Meanwhile, Venezuela – which has around 25% of the world’s total proven crude oil reserves – has seen its exports collapse by nearly two million barrels in recent years due to sanctions placed on the country.

Is there a threat posed by the Middle East being such a major producer?

Middle Eastern dominance, and Saudi Arabia’s vast exports pose a threat to global oil supply: any conflict in the region could lead to severe disruptions to oil production, which could send prices soaring and shockwaves through the global economy.

Historically, the region has been sensitive to geopolitics. The 1990 invasion of Kuwait by Iraq – two large oil producing nations – led to a price shock that lasted nearly nine months and contributed to economic turbulence around the world.

Two similar global oil shocks – the Yom Kippur war in 1973 and the Iranian Revolution in 1979 – has lasting effects.

Why is it such a problem now?

The current turmoil comes at a precarious time for the global economy, with fears of a slowdown unlikely to be helped by higher energy prices.

Oil prices spiked on Monday morning in response to the news of an attack on the Abqaiq processing facility, the largest petroleum-processing plant in the world. That does necessarily mean, however, that petrol prices are going to increase at the same rate.

If the situation remains stable, there could be a 1.6 pence to 4 pence a litre increase in petrol prices, according to analysts at Citigroup.

Much depends on whether Saudi Arabia or the US launches any retaliatory strikes against Iran – who the US is blaming for the attacks – and how long Saudi oil output remains lowered.

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