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Attack On Saudi Oil Facility Leaves US With Global Spare Oil Capacity

Attack On Saudi Oil Facility Leaves US With Global Spare Oil Capacity
While the attack at one of the largest oil facilities in Saudi Arabia is believed to have reduced the capacity of the kingdom to produce oil by half, it has also left the United States to be the only country in the world that has the ability to address the issue of shortage of supply of oil to the global economy.
While on one hand, the US can itself increase its production to meet the shortfall or it can give some relaxation to the sanctions that it has placed on some of the other major oil producers of the world.
Even though the extent of damage to its production capacity because of the attack is yet to be officially announced by Saudi Arabia, according to sources and analysts in the industry, the attack has resulted in reduction of between 5 to 6 million barrels per day (bpd) which is equivalent to 5 to 6 per cent of total global supply of oil.
It is widely accepted for long that the custodian of the spare oil capacity of the world is Saudi Arabia which is also the de-facto leader of the oil producing cartel - the Organization of the Petroleum Exporting Countries (OPEC) as well as its largest producer of oil.
Spare capacity of oil refers to that additional oil that an oil production country can produce and bring onstream and sustain the increased production at a short notice. This provides a cushion for the global markets in the event of unexpected incidents such as natural disaster, or conflicts or any shortage of supply to the global market because of any form of unplanned production reduction.
It would be possible for Saudi Arabia to restore supply within days, said reports quoting industry sources. However if there is a protracted shortage of supply of oil, it will have a major bullish impact on oil prices which will in turn prompt further gains in the production of shale oil in the United States.
Earlier this year, Saudi Arabia was over taken for a brief period by the United States in terms of production and export of crude oil even as the country had removed a ban on oil exports just a few years ago, which was imposed earlier because of increased demand for oil at home to become the largest consumer of oil in the world.
Currently, US accounts for about 15 per cent of the global supply of oil even though industry analysts have for long underestimated the output growth gains of the country.
Iran and Venezuela are the only two countries that currently have spare capacity of oil apart from the United States. However the US president Donald Trump has imposed sanctions, and tightened some earlier ones, on both the countries targeting their oil exports which has resulted in significant drop in exports of crude produced by the both the countries over the last one year or so.
Since the sanctions have been imposed, the drop in Iranian oil exports has been by 2 million bpd while for Venezuela, this number has been much more.

Christopher J. Mitchell

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