The recent twin drone attacks on Aramco’s oil production in Saudi Arabia have triggered the largest disruption seen in global crude oil supplies. This event has also escalated tensions within the Persian Gulf further. Claims of responsibility for these attacks have been made by Yemen’s Shia Houthi rebels, who have been engaged in a war with a Saudi-UAE-led coalition since 2015.
The Oil Price Shock: A Closer Look
Saudi Arabia accounts for 10% of the global oil supply, establishing it as the world’s largest crude oil exporter. Consequently, the attacks have caused crude oil prices to shoot up by over 10%. It is projected that oil prices will hover around $75 per barrel in the upcoming months, assuming that this incident does not ignite international hostilities between a US-led bloc (including Saudi Arabia) and an Iran-led bloc (including the Houthis). The impact on price could be relatively limited in this case, as the world possesses enough reserves to cover the short-term shortfall.
Global Impact
The drone-initiated attacks led to a suspension in the production of nearly 6 million barrels per day, which amounts to roughly 6% of the global oil supply. Additionally, it caused a reduction in output by 5.7 million barrels per day. These events have sparked concerns over the stability of the world’s oil reserves and have resulted in additional premium being added to the price of oil due to geopolitical tensions. High oil prices tend to negatively impact the economy by raising consumer costs. Even if the plants become operational again, prices may continue to rise and remain high due to traders incorporating a “security premium” into prices to counteract anticipated volatility resulting from unrest in West Asia.
| Impact | Details |
|---|---|
| Suspension in production | 6 million barrels per day |
| Reduction in output | 5.7 million barrels per day |
| Rise in oil prices | Over 10% |
Impact on India
India, being a country that imports 80% of its consumed oil, will experience the impacts of this disruption in several ways. The country is already struggling to compensate for the loss of supply from Iran following US-imposed sanctions. Saudi Arabia, as India’s second-largest supplier of crude oil, provides about 17% of the total imports. If the process of restoration takes longer than expected, India could face a crisis due to the volatility in global supply brought on by disruptions in major suppliers like Venezuela, Libya, and Nigeria.
The Growing Threat of Drone Attacks
Amidst escalating tensions between Iran and Saudi Arabia and ongoing conflict in Yemen, the Gulf region faces an emerging threat from drone attacks. As drone technology has become more readily available and affordable compared to traditional weaponry, it also poses greater destructive potential. It allows for remote operation, eliminating direct harm to the attackers. This raises the possibility of drones being used to deploy weapons of mass destruction.
Understanding the Background
Yemen has been embroiled in a complex conflict involving various local, regional, and international actors since 2014. The Houthis, a group of Zaidi Shia Muslims who ruled a kingdom for almost 1,000 years, leveraged widespread discontent towards President Hadi’s postponed elections and stalled constitutional negotiations to mount protests against his government. They migrated from their stronghold in Saada province to the capital Sanaa and imposed a house arrest on Hadi. The situation escalated to a Saudi-led military intervention at the request of Hadi in 2015, following the Houthis’ sweeping advance to the south. This resulted in one of the worst humanitarian crises ever witnessed.