In September 2019 the world’s most important oil facility, the Abqaiq processing plant in Saudi Arabia, was attacked, briefly disrupting nearly 8 percent of global supplies and raising benchmark prices. The Saudi government accused Iran of perpetrating the attacks, exacerbating tensions within the Middle East and among the United States and its regional partners. The event and its aftermath underscored the political fragility of the region and the risks it can still pose to oil markets. At the same time, however, the market’s rapid recovery demonstrated that U.S. and other suppliers were robust enough to compensate for lost Saudi production, suggesting that the geopolitical importance of the region could be changing.
On November 6th, EPIC and The Pearson Institute for the Study and Resolution of Global Conflicts convened a conversation about energy geopolitics and their economic implications, with a specific focus on the lessons learned from the Abqaiq attack. The event featured Robert McNally, the president of The Rapidan Group and a former senior director for international energy at the White House National Security Council; Suzanne Maloney, Senior Fellow and Deputy Director for Foreign Policy at the Brookings Institution; and Harris Public Policy Professor Ryan Kellogg, an EPIC affiliated scholar who studies the economics of oil markets. The event was moderated by Robinson Meyer, EPIC’s Visiting Fellow in Journalism and a reporter for The Atlantic.
McNally began the event by offering an overview of the importance of Abqaiq, which he argued is the most valuable piece of real estate in the world. It is the largest oil processing facility, with a capacity of about 7 million barrels a day. “If the oil market is like the circulation system in the human body,” he explained, “Abqaiq is its heart, because it controls not just half of Saudi production, but it controls much of the [world’s] spare capacity.” Losing this capacity could, McNally argued, push oil prices above $100 per barrel and the global economy into recession.
This was Iran’s third suspected attack on oil facilities in the Gulf region in 2019. The targets, McNally noted, were the major export points for Saudi oil. While Saudi Aramco was able to quickly restore production following the Abqaiq attack, the broader message of three limited attacks was clear: Iran could upend global oil markets if it chose to do so.
Maloney reminded the audience that this type of provocation – targeted at strategic points but calibrated to minimize the likelihood of a significant American response – was typical of the Iranian playbook going all the way back to the seizure of the U.S. embassy in Tehran in 1979. The Trump Administration’s response, she continued, reflected the same frustration experienced by the previous 40 years’ worth of U.S. governments: How do we respond? How do we handle Iran?
There are two core differences between now and 1979, Maloney said, beginning with the changes in energy markets. The first, she noted, is “All the changes in global energy markets and the production that is now coming out of the United States, which is now the leading oil exporter in the world. That is sort of a phenomenon that was completely different from where we stood in 1979.”
The second, she said, was the domestic political consequences of nearly 20 years of U.S. warfare in the region. “[There’s] backlash here at home to the financial and human toll of those wars that has resulted in a political mood that is not distinct to President Trump. That is not distinct to the progressive left of the Democratic party that we hear out on the campaign trail. But is in fact shared across the political spectrum and now has become part of the Washington establishment approach to the Middle East, which is, ‘it’s not our problem.’” President Trump’s decision-making has been consistent with that change in approach. The United States did not respond militarily after the attack on Abqaiq or either of the previous two attacks this year.
Turning to Kellogg, Meyer questioned the new dynamics of supply and prices in today’s global oil markets. Would we have seen 3-digit oil prices if Abqaiq could not have been easily repaired, or could other supplies cushion the blow? Kellogg broadly agreed with McNally, noting that, while U.S. shale can respond much more quickly to price shocks than conventional oil production, it could not respond quickly enough to compensate for a major disruption like taking Abqaiq offline. For instance, a new offshore drilling rig might see oil in five years at best. “Shale can respond much more quickly than that, which is good, but there’s limits to that. What makes shale, and I agree with Bob here, not a swing producer, it’s that it’s not a light switch,” Kellogg responded.
Shale might not make the United States a swing producer, able to step into markets at a moment’s notice, but that doesn’t mean it hasn’t shaped America’s global outlook. McNally fears that the United States has lost sight of its vulnerability to oil markets because it is blinded by the achievement of being a net exporter. In general, he said, “I think we are complacent now about our ongoing vulnerability to oil supply disruptions in the Middle East because of our shale supply revolution
So, has the shale boom actually changed American interests? McNally responded that, while the United States is still not immune to shocks from the Gulf and elsewhere, “I would say the shale gas, so natural gas boom, which preceded the oil boom, [and the oil boom] are both unambiguously good things for U.S. security, even global security and economic growth.”
Kellogg’s answer was more qualified. The United States, he said, now exports about as much oil as it imports, making it much more insulated overall from external oil shocks than in previous decades. That overall picture, however, masks important distributional and regional differences in the country. For regions like West Texas, where oil production is high, a price spike might actually result in net economic benefits. Alternatively, regions like Chicago, where production is low but consumption is high, would see severe economic costs. And, he continued, “If you think about who our main trade partners are – Europe, China – these are still major oil-importing areas. If China gets absolutely hammered by a price shock, that’s going to spill over to us.”
With the energy picture shifting, Meyer asked if shale has changed the menu of policy options in the United States when talking about climate change.
Kellogg noted, “There’s a broad set of policy options on the table…[I]f you look at the fossil fuel export profile it’s exactly what you said: we are now exporting oil for the first time in ages. We’re exporting natural gas at an increasing rate. There is this coal to gas substitution in the U.S. electricity generation mix. There are questions about how much of that coal is going to be exported. There’s a bunch of coal sitting in Wyoming that’s not getting burned anymore. Is that going to start heading over by rail to the West Coast out of a port and then over to China or Japan?”
Meyers commented, “There are many economic reasons and physical reasons and engineering reasons why we will be burning oil for a long time. And yet to me, this scenario sounds a lot like pretty effective climate policy. Because if there is one thing you want to do to get American consumers to move to electric vehicles for instance, it’s move the price of gas around a lot.” For example, there have been only two years where SUVs did not increase as a share of American vehicles and that was in 2007 and 2008, years of high volatility in the oil market.
Overall, are we going to see more climate policy come out of an era of high oil prices? Kellogg gave his take: “If part of the path to decarbonizing transportation is going to be high gasoline prices, I’d much rather those high gasoline prices come about for policy reasons, i.e. a really big gasoline tax that actually properly accounts for the cost of carbon and all the other bads that come from gasoline, than high oil prices and high cost of supply. If gas is going to be $5 a gallon…because oil is $150, that means we are drilling lots of expensive wells in not particularly promising places as opposed to actually keeping oil supply down, having a robust tax that actually disincentivizes internal combustion.”