Imagine an oil market with one quarter of total supply controlled by two countries hostile to the West.
Such an outcome is possible from international mishandling of the Oct. 2 disappearance and suspected murder of journalist Jamal Khashoggi in the Saudi embassy in Istanbul.
Suspicion runs high against the Saudi government and its de facto leader, aggressively reformist Crown Prince Muhammad bin Salman.
Riyadh denies knowledge about Khashoggi’s fate and warns of retaliation via the oil market against punitive responses.
Neither prejudgment nor hasty resort to the oil weapon helps anything at this point.
Many analysts point out that the kingdom would hurt itself by cutting production to increase crude prices.
But possibilities involving oil don’t end there and should infuse international responses with caution.
If Riyadh wanted specifically to damage the US it would not cut production until presidential campaigns began stirring.
An oil-price jolt would shock an economy possibly faltering then from trade conflicts, rising interest rates, and cyclical corrections, weakening support for US President Donald Trump and congressional Republicans clutching his shirttails.
By early 2021, the US thus could have oil production rising in response to the price increase and a White House and Congress run by Democrats.
And Saudi Arabia and sympathizing producers could inflict lasting damage by restarting idle production capacity.
The supply surge and price plunge would wallop shale producers, many having overinvested in oil-price elevation. It would bolster a Democratic government sure to be toughening regulation of oil and gas producers. And it would confirm that Saudi Arabia no longer intended to maintain 1.5-2 million b/d of spare production capacity to protect the world against oil-supply shocks.
The kingdom by then would have deepened its now-nascent friendship with Russia into an alliance able to produce 24 million b/d of oil—when and if doing so served the internationally scorned partners’ mutual interests.
Responses to whatever happened to Khashoggi should be tempered by the world’s twin needs for fewer pariahs and fewer state-sponsored atrocities.
(From the subscription area of www.ogj.com, posted Oct. 19, 2018. To comment, join the Commentary channel at www.ogj.com/oilandgascommunity.)