September 16, 2019 / 11:15 AM / a month ago

Breakingviews - First oil cut isn’t the deepest for world economy

Oil pours out of a spout from Edwin Drake's original 1859 well that launched the modern petroleum industry at the Drake Well Museum and Park in Titusville, Pennsylvania U.S., October 5, 2017.

LONDON (Reuters Breakingviews) - The last thing the slowing world economy needs is a big and unexpected disruption in oil output. Weekend attacks which took out roughly half of Saudi Arabia’s crude output appear to fit that bill. But even fragile global growth can probably withstand this first cut.

Brent crude prices rose by as much as a fifth on Monday morning, the biggest intra-day percentage gain since the 1991 Gulf War. While prices were up less than 10% in later trading, that’s still a big jump. Sharp hikes in energy costs caused by supply shocks usually hurt global growth. The more consumers and businesses have to pay for oil and oil products, the less they have to spend on other things. The Organisation for Economic Co-operation and Development in 2011 estimated that a sustained $10 jump in the cost of a barrel of oil would knock 0.2 percentage points off its members’ growth in the second year after the shock.

It may take weeks rather than days to get Saudi production back to normal. However, the kingdom’s reserves can make up for a temporary shortfall. OECD countries, meanwhile, have inventories of oil and oil products that are equivalent to about 60 days of total demand and most of them are above the International Energy Agency’s reserve requirement for 90 days of net imports, according to UBS analysts. U.S. President Donald Trump has already authorised the release of oil from America’s strategic reserves if needed and said this would be enough to keep markets well-supplied. The United States can also ramp up production of shale oil within months in response to higher energy prices. The world is becoming progressively less dependent on Saudi oil.

Yet with both the United States and China grappling with a slowdown, there’s little room for complacency. The Iran-aligned Houthi movement said on Monday that Saudi Aramco’s oil processing plants were still a target and could be attacked at “any moment”. United States rhetoric towards Iran is increasingly bellicose. Sustained disruptions to Middle Eastern oil supply – or anything that heightens the risk of them – will buoy crude. That will deliver the deepest cut to growth.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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