Oil prices were up more than 12 percent on Monday and stocks fell for the first time in nine trading days after a missile attack on a major Saudi oil-processing facility knocked about half that country’s production capacity (and 5 percent of the world’s) offline.
We still don’t know how bad this situation is, which is why analysts are talking about the possibility that oil prices might rise much more if we get more bad news in the coming days. Here are the three main economic risks we face:
First, if this attack causes the Saudi facility to be offline for longer than expected, the Saudis may run out of stockpiled supplies to export, and that could cause a shortage that pushes up prices even more.
Second, there could be additional, similar attacks on Saudi facilities in the future that cause more supply disruptions. After all, whoever was behind this attack (U.S. officials are claiming to have evidence that it was Iran itself, not just Houthi rebels in Yemen backed by Iran) has shown they have the capability to do it. They might be able to do it again.
Third, if this attack leads to military escalation by the U.S. or Saudi Arabia, that could further disrupt the oil trade in the Gulf region.
The attack also reduces the likelihood of a positive risk that had appeared to be on the table until a few days ago: If the thaw in the Trump administration’s position toward Iran had persisted, that could have eventually led to a renewed nuclear deal with Iran (or something like it) and to the resumption of significant Iranian oil exports, which would have tended to reduce the price of oil.
Yesterday, President Trump tweeted ominously that we were “locked and loaded” and awaiting a Saudi cue on how to respond to the attack, though today he expressed a reluctance to go to war. The latter comment is consistent with his overall approach to foreign tensions — inclined toward bellicose talk but hesitant to actually launch attacks. In June, Trump called off a planned attack on Iran that would have been a response to actions to disrupt oil shipping that his administration had also blamed on Iran.
Other countervailing factors give us reason to think global oil-supply disruptions might not affect the U.S. economy as much as you would expect. The U.S. now produces about the same amount of oil we consume, unlike in prior decades when we were heavily dependent on oil imports. So while higher oil prices mean painful gasoline price increases for consumers, they also mean job creation and higher income in oil-producing regions of the country. And petroleum products make up a smaller slice of the consumption in our economy than they used to. So while spikes in oil prices caused by external factors have often been drivers of recessions in the past, those risks may not be as acute as they once were.
This may be one reason that, while oil prices went up massively today, U.S. stocks fell only modestly. The Dow fell just over half a percent and remains within 2 percent of its record high. Today’s move is a signal that investors are troubled by the oil situation but not panicked about it.
Still, trouble in the global oil markets is not good for our economic outlook. Europe remains a major net oil importer, and economic weakness there is already a significant risk factor for the U.S. economy. If the oil situation worsens, so will the knock-on risks to the U.S. The president, who seems terrified about what an economic slowdown would do to his reelection prospects, is likely to be considering that as he weighs how to react to the attack.