Attacks on state-owned Saudi oil installations over the weekend crippled the world’s second-largest oil producer and sparked new geopolitical tensions — but whether consumers feel the pain hinges on how quickly normal production is restored, experts say.
The strikes mark the biggest disruption to the global oil market in decades. Saudi Aramco churned out 9.85 million barrels per day in August, according to the U.S. Energy Information Administration. But Saturday’s drone assault on two crucial oil installations forced the kingdom to suspend production of 5.7 million barrels of crude, or nearly 6 percent of the 100 million barrels the world consumes each day.
The situation weighed on Wall Street, pushing the Dow Jones industrial average down more than 150 points before the benchmark index recover somewhat. The Dow was down about 100 points, or 0.4 percent. in late-morning trading. The Standard & Poor’s 500 and tech-heavy Nasdaq composite were also negative by about 0.2 percent.
The company initially said it hoped to restore a third of that lost production — about 2 million barrels — by Monday, but has since scaled back. It’s given no timetable for a full recovery.
The situation could lead to a 10- to 25-cent increase in gas prices in the coming weeks, said Ed Moya, an analyst with OANDA. Though such an increase would be relatively modest, it would come at an unwelcome moment, threatening the U.S. economy’s most powerful engine amid mounting fears of a slowdown.
“All the sentiment indicators have been softening, and any pressure on the consumer could derail the case for higher equities we’ve seen in recent weeks,” Moya said.
Consumer spending powers about 70 percent of the U.S. economy, and retail sales rose in August, even as other key economic indicators weakened under the weight of the trade war.
The U.S. manufacturing sector contracted in August for the first time since 2016, and the Commerce Department recently revised second quarter economic growth estimates because growth had slowed more than previously thought. Meanwhile, constant trade tensions and signs of a slowdown are sending investors into the bond market in droves.
Falling demand had sent gas prices lower after Labor Day, so consumers should be able to bear a short-term surge in prices more easily. On Monday, the average price for a gallon of gas in the U.S. was $2.564 according to AAA, about 28 cents lower than a year ago.
Moya estimated that an increase would last a month or so, provided that political tensions ease and there are no further attacks. Officials have said Saudi Arabia’s oil stockpile will allow it to meet export obligations for several weeks while Aramco recovers, and OPEC and Russia are holding off on unleashing additional supplies for now despite the magnitude of disruption.
If Saudi production doesn’t recover quickly, there will be implications for other consumer travel costs. In 2018, the global airline industry spent $180 billion on fuel, accounting for 23.5 percent of operating expenses, according to the International Air Transport Association.
“The hardest hit on this price surge is the cruise ships and the airlines,” Moya said. “I think you’d see bit of a waiting period, but those costs would be passed on. You’re definitely going to see that weigh on the consumer.”
Carnival Corporation, United Airlines and Southwest Airlines were all down more than 1.5 percent in premarket trading. Delta Air Lines was down 2.25 percent.
Crude oil prices soared nearly 20 percent Monday in the largest-ever intraday jump, then declined some. Brent crude was up 10 percent at markets’ open, trading around $66 a barrel.
On Sunday, President Donald Trump announced via Twitter that he had authorized the release of a yet-unspecified amount of crude oil from the Strategic Petroleum Reserve to “keep the markets well-supplied.” Tapping into the 600 million barrel reserve is uncommon, generally reserved for extreme circumstances.
The U.S. was both the world’s largest producer and consumer of oil in 2018, according to the U.S. Energy Information Administration. In a tweet Monday, Trump insisted the U.S. wasn’t reliant on Middle Eastern oil but would unleash its reserves to help allies.
“Because we have done so well with Energy over the last few years (thank you, Mr. President!), we are a net Energy Exporter, & now the Number One Energy Producer in the World,” Trump tweeted. “We don’t need Middle Eastern Oil & Gas, & in fact have very few tankers there, but will help our Allies!”