The Saudi Oil Shock: Who Wins, Who Loses

On September 14th, drones targeted Saudi Arabia's Abqaiq oil refinery and Khurais oil field. The strikes reportedly knocked out more than half of Saudi Arabia's total output. That amounts to a whopping 6-7% of the global daily oil supply. Not surprisingly, before the dust had settled, the press sounded an alarm and spread fear. Then, President Trump jumped in, claiming the attack “won't affect us and ultimately I don't think it will affect the world either.” Well, let’s take a look at the data.

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.


Let’s take a look at the two big losers: India and Turkey.

India imports over 80% of the oil it consumes, making it one of the largest importers of oil in the world. While the world’s economies have, on average, become significantly more energy efficient over time, India’s use of oil per unit of GDP has hardly changed in over 50 years and is well above the global average. So, when crude prices spike, India’s external balance (read: current account) takes a hit, and the rupee slumps.

Turkey imports almost 85% of its oil. Like India, each 10% increase in the price of crude oil would result in a half a percent increase in its current account deficit as a percent of GDP.

Turning to a few countries that benefit from price increases, it turns out that Russia will be a big winner. As indicated in the table below, Russia’s external balance improves by 1.2% of GDP for each 10% increase in the price of oil.

So, the recent attacks on the Saudi’s oil facilities promise to elevate oil prices, but leave them, for the time being, in the so-called sweet spot, with no particular world disruptions. I wonder if President Trump had studied the UBS oil-price model? We will never know. But, we do know that India and Turkey will take hits and that Russia will be a big winner. This promises to throw storm clouds over the Indian rupee and Turkish lira and sunshine over the Russian ruble.


Past Blogs

Worried About A Recession? Relax

September 10, 2019

Everyone seems to be wringing their hands about what they fear is an oncoming recession. Indeed, as a sign of the level of the public’s angst, The Economist magazine reports that Google searches related to the word “recession” have surged. If that wasn’t enough evidence of the hand wringing, the Chairman of President Trump’s Council of Economic Advisers, the respected Tomas Philipson, recently indicated that he was worried about the steady negative drumbeat in the press: that a recession might be just around the corner. Philipson put his finger on the problem when he said, “The way the media reports the weather won’t impact whether the sun shines tomorrow. But the way the media reports on our economy weighs on consumer sentiment, which feeds into consumer purchases and investments.”

more »

Financial Miscalculations - A Permanent Solution

September 03, 2019

The Gregorian calendar has been around since 1582. Even though it is widely used throughout the world, it contains flaws that give rise to confusion and financial miscalculations. The replacement of the Gregorian calendar with the Hanke-Henry Permanent Calendar(HHPC) will throw confusion and financial miscalculations into the dustbin. One set of problems thrown up by the Gregorian calendar is the so-called “day-count problem.” For example, to determine how much interest accrues on financial instruments— like bonds, mortgages, swaps, and forward-rate agreements—day counts, the number of days interest accrues, are required. With the Gregorian calendar, complexities and anomalies exist that create difficulties, which give rise to day-count problems.

more »

It’s Time For Colombia To Dump The Peso

August 27, 2019

Colombia’s peso is in trouble, again. Against the U.S. dollar, the peso has shed 20% of its value in a little more than a year and 7% in the last month. Like most Latin American currencies, the Colombian peso bobs up and down like a yo-yo, but its long-term trend is one of weakness. Indeed, since August 2014, the peso has lost 45% of its value against the greenback. Talk about a theft!

more »

Macri’s Kiss Of Death: Argentina’s Peso And The IMF

August 23, 2019

On August 11, the ticket of Alberto Fernandez and Christina Kirchner crushed the hapless President of the Argentine Republic Mauricio Macri in a primary election. Their victory virtually guarantees that the Fernandez-Kirchner team will occupy the Casa Rosada after the presidential election scheduled for October. For many, including the pollsters, Sunday’s results were a stunner. Not for me. I have been warning for over a year that gradualism, which is Macri’s mantra, is a formula for political disaster. If that wasn’t enough, the Argentine peso is another time bomb that has sent many politicians in Argentina into early retirement.

more »

China’s Rare Earths, Locked And Loaded

July 18, 2019

President Trump has picked a fight with China on trade. This has run the gamut of badgering to the imposition of tariffs on Chinese exports to the United States. And, if that is not enough, the President threatens to lay on more tariffs if China fails to comply with a host of U.S. demands. China will not stand idly by and be beaten with a stick, but will they pull the trigger? One weapon that China has in its arsenal is rare earths. As the Global Times,a state-owned Chinese newspaper, put it: rare earths are “an ace in China’s hand.” Rare earths cover 17 important elements on the periodic table. And, they are elements in which China occupies a dominant position. Furthermore, the Chinese leadership is well aware of the strategic importance of rare earths. As far back as 1992, Deng Xiaoping stressed that “the Middle East has oil; China has rare earths.”

more »