How an Aerial Barrage Cut Saudi Oil Production in Half

Over the weekend, Saudi oil facilities were attacked by drones allegedly launched by Houthi rebels in Yemen, knocking off nearly half of Saudi oil production, spooking the Saudi stock market, and raising fears of a spike in both the price of oil and regional tensions. It’s one of the biggest attacks on global energy infrastructure in decades, but it’s still not clear if the damage will be short-lived and easily contained, or if it will weigh on the global economy for weeks to come and lead to further escalation in regional conflict.

What officially happened?

Houthi rebels in Yemen took credit for the strikes Saturday with multiple drones that damaged Saudi oil fields and Abqaiq, a key oil-processing facility in the eastern part of the country. The attack on the very heart of the global oil industry—Abqaiq processes about 7 million barrels of oil a day, or roughly 7 percent of the world’s crude output—made real what had been long considered by Saudi and Western security planners to be a nightmare scenario.

Saudi officials shut down more than 5 million barrels a day of oil-output capability, about half the kingdom’s daily production, while they put out the fires and assessed the damage; a formal report on the extent of the damage and the duration of any disruption is expected early next week, but Saudi oil officials told Reuters the outages could take weeks to repair.

The attacks follow other Houthi strikes on Saudi oil-pumping stations in May and a natural gas facility last month, part of the wider, yearslong conflict between Riyadh and rebellious forces in neighboring Yemen.

What role did Iran play?

One thing is clear: Houthi capabilities to use drones for long-range strikes have increased dramatically over the last year, said Farea al-Muslimi, the co-founder of the Sanaa Center for Strategic Studies. Cheap drones enable unconventional nonstate actors to penetrate Saudi Arabia’s advanced air defense systems, which are geared to protect against higher-end threats, he said.

But U.S. officials, as in previous Houthi-claimed attacks, have few doubts about who was behind it. U.S. Secretary of State Mike Pompeo was quick to blame Iran for the strike, which he called “an unprecedented attack on the world’s energy supply.” Like many security experts, he dismissed the idea that Houthi rebels had developed the capacity to deliver long-range drone strikes across Saudi territory: “There is no evidence the attacks came from Yemen,” he said on Twitter. (President Donald Trump said late Sunday that the United States is “locked and loaded” to respond to the attack.)

After U.S. officials concluded that the May drone strike came from Iraq, some in the Persian Gulf suspect Iran-backed militias in Iraq—rather than those based in Yemen—may have carried out the latest attack and may have even used more sophisticated weapons than drones, such as missiles. Iraq on Sunday denied the attacks came from its territory. (A senior administration official told FP on Monday that Iran used a mix of more than two dozen drones and cruise missiles in the attack.)

Iran dismissed the U.S. allegations on Sunday, calling them “pointless,” while Islamic Revolutionary Guard Corps commanders threatened missile attacks on U.S. military assets in the region. Iran has come under increasing pressure this year as U.S. sanctions on its oil sector have slashed Tehran’s exports from about 2.5 million barrels a day to close to zero, hammering its economy and driving Iran into breaching several terms of the 2015 nuclear accord.

Why is this such a big deal?

The attack on the epicenter of Saudi Arabia’s oil industry is a potentially huge development for several reasons.

First, it could send oil prices sharply higher: Oil-market experts figure prices could jump anywhere from a few dollars a barrel to more than $10 a barrel. Crude closed at around $60 a barrel on Friday. (Crude spiked early Monday by nearly 20% before settling down to about $65 a barrel, more than 8% higher.)

While it’s unclear how extensive the damage is, the outages so far represent about 5 percent of global oil supply, and few countries are in a position to rapidly scale up production to make up the shortfall. Saudi officials said they would tap into crude stocks to ensure that exports continue at current levels, which could minimize the shock to the market. And Pompeo said the United States would work “to ensure that energy markets remain well supplied,” which could imply a willingness to tap the hundreds of millions of barrels stored underground in the U.S. Strategic Petroleum Reserve; Trump later confirmed U.S. willingness to tap the reserve.

“If the supply disruption lasts more than a few days, the ramifications from crude markets will be huge,” said Richard Mallinson, the co-founder of Energy Aspects, an energy consultancy. “There is almost no spare capacity outside of the kingdom, and even a coordinated SPR release would struggle to compensate for a large Saudi outage.”

Second, the attack on Abqaiq brings back geopolitical risk to an oil market that for years has shrugged off physical threats and obsessed instead about economic growth, trade wars, and the like. One of the most securely guarded facilities in Saudi Arabia’s extensive oil infrastructure, Abqaiq has long featured in worst-case scenarios of a terrorist strike on important energy infrastructure.

“The image of invulnerability has been erased,” one analyst told CNBC on Saturday.

If oil markets return to worrying about geopolitical risks as they did in years past—and there is plenty to worry about, from Iranian saber-rattling in the Strait of Hormuz to ongoing strife in Libya to the latest drone strikes—it could mean pricier crude for months to come. That could act as a further brake on economic growth at a time of rising concern over trade tensions and a generalized manufacturing slowdown.

So what happens now?

The attacks threaten to snuff out the glimmers of a diplomatic breakthrough between the United States and Iran in the wake of the departure of U.S. National Security Advisor John Bolton, including a potential meeting between Trump and Iranian President Hassan Rouhani.

At the least, the strikes seem to kill any chance Washington would accept a French-backed plan to offer Iran short-term relief in a bid to salvage the 2015 nuclear deal, which Trump pulled the United States out of last year. And while Trump has been reluctant to use force against Iran—calling off an airstrike at the last minute after the downing of a U.S. drone in June—Pompeo on Saturday vowed to make sure that “Iran is held accountable for its aggression.” U.S. defense officials huddled Sunday to figure out the next steps, saying “everything is on the table,” an administration official told Foreign Policy.

While some analysts expect restraint from Washington, they anticipate some form of retaliation from Saudi Arabia—ranging from an intensified air campaign against Houthi forces in Yemen to potential covert operations against Iran itself.

“We are talking about a new level of confrontation,” Muslimi said.

Lara Seligman contributed to this report.

This article was updated Sept. 16, 2019.