The Saudi Oil Shock: Who Wins, Who Loses
Brent crude prices surged by 15%, from $60/bbl on September 13th to $69/bbl on the 16th, the first trading day after last weekend’s drone attacks. Brent crude is now trading at $65/bbl. While a significant increase, the response to this incident has kept oil in what Arend Kapteyn of the Union Bank of Switzerland (UBS) deems to be in a safe zone ($50-$75/bbl). When prices are in this sweet spot, the “gains” and “losses” from oil price changes are roughly balanced, so the global economy can hum along without missing a beat.
But, even though we might still be operating in the oil-price sweet spot, crude oil prices are—as a result of a big chunk of the Saudi’s capacity being temporarily knocked out—higher than they would have been absent the drone attacks. Furthermore, the repairs on the Saudi facilities will most likely not be as straightforward as many seem to think. The Abqaid facility is highly complex and specialized. Indeed, even planned maintenance at Abqaid can take up to three months. In consequence, there aren’t off-the-shelf replacement parts. Repairs, therefore, will take an extended period of time And, if that’s not bad enough, there could be further attacks on Saudi facilities, which appear to be vulnerable. Indeed, the markets have already priced in higher future prices, as reflected in the forward curves that contain prices for future crude delivery.
The specter of elevated crude prices raises the obvious question: what countries are the biggest winners and losers? To answer that, I use results from a UBS modeling exercise. The table below shows the negative effect that 10% price increases (starting at $50/bbl and moving up to $100/bbl) would have on the current account balances of oil consuming countries. The numbers are given in changes in basis points as a percent of GDP. So, for India, a 10% price increase would result in an increase in the Indian current account deficit of one half a percent (50 basis points) of GDP.
PROF. STEVE H. HANKE
Let’s take a look at the two big losers: India and Turkey.