A drone attack on Saudi Arabia\'s oil refineries further worsens the world economy that has been hit by uncertainty due to the escalation of the trade war between the United States and China.
By
Ari Kuncoro
·5 minutes read
A drone attack on Saudi Arabia\'s oil refineries further worsens the world economy that has been hit by uncertainty due to the escalation of the trade war between the United States and China. The attack has caused panic in the world oil market as reflected by the increase in the prices of both crude oil with standard quality West Texas Intermediate and crude oil with premium quality Brent. There is a price difference of approximately US$10 per barrel between the two crude oil types. Brent oil prices rose nearly 20 percent to $72 per barrel, the highest increase since January 14, 1991 at the time when the Gulf War broke out.
While the price of WTI crude oil rose to around $65 per barrel. This situation caused panic, raising speculation that oil prices would rise to $100 per barrel or even more. This has led to the notion that a recession that has been feared will become a reality in the near future.
If this shortage of supply cannot be covered, there are several scenarios of rising world oil prices.
The attack reduced oil production by approximately 5.7 million barrels per day from world markets. The cut in the oil production, if not compensated, will result in an increase in oil prices. If this shortage of supply cannot be covered, there are several scenarios of rising world oil prices.
If within six weeks the situation of supply shortages is not resolved, the price of Brent oil could jump by up to $9 dollars per barrel to $75 dollars per barrel. Another scenario, if this shortage cannot be overcome, the price will rise above $75 per barrel. The US may issue strategic oil reserves to prevent prices from approaching $100 per barrel.
Competition
The oil market is now different from that in the 1980s and 1990s because the Organization of the Petroleum Exporting Countries (OPEC) is no longer a dominant player.
OPEC’s oil exports currently only cover 60 percent of world oil exports, so it is more like the contestable oligopoly Cournot model.
OPEC, or Saudi Arabia as the de facto leader of OPEC, risks losing market share if the price of oil is too high and a loss if the price is too low. Non-OPEC countries with higher production costs can enter the market if oil prices are too high. The optimal oil price ranges from $50-$60 for WTI.
In order to ensure that oil prices are not too high, the Aramco oil company has issued a statement saying that oil supplies will recover by the end of September. Simultaneously, the US also said it would use its strategic oil reserves. As a result, the price of WTI crude oil fell to around $59 per barrel.
However, the US seems to choose to impose additional sanctions on Iran rather than conducting military attacks.
Opportunities for oil prices to rise again remain high because it is not impossible that there will be an escalation between Saudi Arabia, supported by the US, and Iran. However, the US seems to choose to impose additional sanctions on Iran rather than conducting military attacks.
The shadow of a recession in the US seems to underlie this decision. Without shocks in the oil market, a recession in the US is expected in the next 12 months. The Organization for Economic Co-operation and Development (OECD) predicts that US economic growth will reach 2.4 percent this year and fall to 2 percent in 2020.
Impact on Indonesia
The rupiah, which hovered around 14,000 per US dollar in the past two weeks, showed that the attacks on Saudi Arabian oil facilities did not have much negative impact, unless there was an escalation in the conflict. The fall in oil prices tends to strengthen the rupiah exchange rate because it can help stabilize production costs.
Such a state of affairs is actually good enough to make people increase consumption. However, based on August 2019 data, it is estimated that there will not be a significant increase of positive expectation due to the trade war news.
Bank Indonesia’s Consumer Confidence Index (IKK) edged down to 123.1 in August from 124.8 in the previous month. The decrease in IKK occurred in almost all categories of respondents based on their expenditures. The biggest decrease occurred in respondents with expenditures of between Rp 2.1 million and Rp 3 million per month.
In terms of age, the decline in IKK occurred in almost all age groups. With this illustration, it is estimated that public consumption will grow 5.2 percent annually. On the contrary, the business condition and the optimism of Indonesian business players in the second quarter of 2019 continued to grow even though they might drop slightly in the third quarter following the slight decline in IKK.
The Business Tendency Index (ITB) increased in the second quarter of 2019 to 108.81 from 102.10 in the first quarter. This improvement was due to an increase in income, the use of production and the average number of working hours.
With this situation, investment in the third quarter of 2019 is estimated to grow 5.1 percent on an annual basis. The uncertainty caused by the US-China trade war will continue to depress the growth of Indonesian exports. But the trade balance will record a surplus again as imports will decline like those taking place in August.
The overall positive effect of the above macroeconomic variables on new economic growth will be felt in the fourth quarter of 2019 or the first quarter of 2020, then decrease again with the possibility of a recession in the US in the third quarter of 2020.
Ari Kuncoro, Professor, Economics and Business School, University of Indonesia