LONDON, 28 February 2006 — The economic impact of Al-Qaeda’s unsuccessful suicide bomb attack on the Abqaiq oil refinery, the world’s largest facility, last Friday has potentially wide-ranging implications based primarily on market risk dynamics. Perhaps more revealing is the fact that this was the first direct attack by Al-Qaeda on physical oil installations in the Gulf Cooperation Council (GCC) states.
Commodity traders usually argue that such incidents affect market perception of risk of potential future production and supplies, and therefore the increase in price is more to do with market jitters than with a disruption in actual production and supplies. In reality both wholesale and retail consumers are paying a premium on the fear factor generated by such incidents in a potential risk to supplies. Also some important customers may increase demand for say oil during uncertain times to boost stockpiles, whether strategic or otherwise. In the specific case of Saudi Arabia, there are several risk factors at play. These include commodity price risk, security risk, production risk and export market risk.
Minister of Petroleum and Mineral Resources Ali Al-Naimi had to deny reports even by the Arab media that the attacks had briefly stopped the flow of oil after a pipeline was damaged.
The Abqaiq refinery is crucial to Saudi oil production because it handles about two-thirds of the country’s oil production.The attack did not interrupt exports but oil prices jumped amid fears that Al-Qaeda terrorists were planning a renewed campaign in their fight against the industry.
Al-Qaeda’s ideological reasoning is as breathtaking in its primitiveness, crudity and abstractness, as it is in its oversimplification. The immediate impact of its failed attack was a hike in oil prices. The beneficiaries are the oil producers, exporters and traders. Since Saudi Arabia is the world’s largest oil producer and exporter, it is also the largest beneficiary. Yes, price risk, security risk, production risk and export market risk carries extra costs. But very often these are passed on to the consumers, just as oil companies pass on the costs of higher oil prices to motorists and other retail customers.
The fact that the Abqaiq attack was foiled and as such output was not affected at the refinery, suggests that the Kingdom does take security of its oil installations seriously.
