Oil-hub attack may keep prices high
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Terrorists' raid shows Saudis' vulnerability
Paul Blustein
Washington Post
May. 31, 2004 12:00 AM
WASHINGTON - For months, fears of a terrorist attack on major petroleum facilities have helped drive crude oil and gasoline prices steadily upward. Now, just as prices were starting to retreat from record levels, a deadly assault in one of the industry's most vital hubs has raised those worries to new heights.
This weekend's brutal attacks in the Saudi Arabian city of Khobar, which left 22 people dead, including at least one American, was an attack on residents of a housing complex rather than refineries or terminals or pipelines, so it will have no direct impact on petroleum supplies.
But it showed that Islamic militants are capable of striking in the heart of the kingdom's oil-producing region, so it is bound to intensify concerns about the vulnerability of tightly wound world markets to a supply disruption, analysts said Sunday.
"In terms of real physical flows of oil, it won't do anything," said Fareed Mohamedi, chief economist at PFC Energy, a Washington-based consultancy. "But from a psychological point of view, this just confirms the incredible fears in the market. This is reality, this is not just speculation. . . . And this is the main artery of oil. It's ground zero."
Not only was the attack the second in a month against Westerners working in the Saudi oil industry, but unlike the previous episode, which took place near a Red Sea petrochemical complex, this one came in the nation's eastern zone, where the bulk of the kingdom's oil is piped to a densely packed network of refineries and export terminals on the Persian Gulf. The episode is all the more worrisome, given Saudi Arabia's status as the only nation with a significant amount of spare production capacity.
"The fact that you've had two in one month suggests that there is a concerted effort to target oil facilities in particular," said Simon Wardell, senior energy analyst at the World Markets Research Center in London. "So this will raise that risk element, the extra premium that's put on prices in case something very bad happens. And if something very bad does happen in Saudi Arabia, that could cause real shortages."
The attack came as Saudi Arabia vowed to use its vast capacity to bring down prices because of fears that soaring energy costs could derail the global economic expansion. When crude prices surged to nearly $42 a barrel this month, Saudi officials announced they would immediately increase production to about 9 million barrels a day from about 8.5 million and raise output even further to whatever level was demanded by the market.
The Saudis are the only member of the Organization of Petroleum Exporting Countries capable of making such promises. Although the kingdom is no longer the world's biggest producer - Russia is - it sits on about one-quarter of the world's reserves, and unlike Russia, whose wells are pumping as much as possible, the Saudis contend they could easily ramp up production to 10.5 million barrels a day or more. Based on expectations that the Saudis would overcome objections from other OPEC members at a meeting scheduled Thursday, crude oil slid as low as $39 a barrel last week.
For the longer term, a big unknown is how many of the thousands of foreigners working in Saudi Arabia will feel obliged to leave. The Saudis are not as dependent on foreign expertise as they were 25 years ago; they have used their wealth to create a university system that has produced many petroleum engineers. "So they are much better prepared to operate with fewer foreign nationals," said Philip Verleger, an energy expert at the Institute for International Economics.
For that reason and others, Verleger said, the impact of this weekend's attack might produce only a short-term upward blip in prices. The Saudis "have built a lot of redundancy into their system," he said, so if one facility is disabled others can come online fairly readily. Moreover, much of the recent run-up in prices has been caused by a shortage of gasoline refining capacity, and if Americans appear to be consuming less gasoline than expected, gasoline prices will drop, which will drag crude prices down, perhaps to the mid-$30s, Verleger predicted.
Other experts were less sanguine. "The big fear is that someone will get a truck or boat or small plane and crash it somewhere vulnerable," like a refinery, said Michael Lynch, president of Strategic Energy and Economic Research, who conjectured prices would shoot up $3 to $5 a barrel in the next couple of days before receding. "Even a minor loss of supply will hurt the market because it's just so tight right now."
Dennis
