Oil Anxiety Hits A Slippery Slope

The prospect of more attacks in Saudi Arabia will keep the markets on edge

Any lingering doubts about whether Saudi Arabia has become a dangerous place for foreign workers came to an end on May 29 when al Qaeda-linked militants killed 22 expatriates and Saudis in the oil city of Khobar. The gunmen's intent was unmistakable: Undermine the Saudi regime with high-profile attacks on foreign workers in the kingdom's oil industry. "Our heroic mujahideen" have stormed companies "that are specialized in oil and steal the wealth of Muslims," said a statement posted on the Internet in the name of the "al Qaeda network of Arabia."

The Khobar bloodbath, which followed a deadly assault on a refinery in Yanbu on May 1, is unlikely to be the last of these attacks. The Saudis woke up to the dangers of extremists in their midst only a year ago when bombers destroyed compounds housing Westerners in the Saudi capital. No less an authority than the British Ambassador to the kingdom, Sherard Cowper-Coles has warned that "further attacks may be in the final stages of preparation."

Most analysts doubt that the militants will succeed in seriously disrupting the flow of oil in the kingdom. Nevertheless, attacks on easier-to-hit targets such as office buildings are expected to keep the oil markets on edge. Jim Burkhard, director of oil market analysis at Cambridge Energy Research Associates, says prices could spike further -- perhaps to $50 per barrel -- in the event of new instability. "Although no oil-producing infrastructure has been attacked, any hint of disruption in the region is amplified in the price," he says.


There is certainly plenty for the markets to be nervous about. With inventories tight and world demand for oil soaring, there is little production capacity to spare -- perhaps 2 million barrels a day in an 80 million bbl. per day market. Although OPEC ministers helped knock prices down by nearly $2 per barrel on June 2 by saying that they will temporarily increase production, few can pump out more except Saudi Arabia. It is ramping up output from about 8.3 million bbl. per day to over 9 million bbl. per day. Any serious disruption in Saudi output could send the markets into panic.


How likely is such a scenario? While the extremists have not threatened to cut Saudi production, it's always possible that a militant could fly a plane into a terminal or the massive complex at Abqaiq on the Gulf coast. But seasoned experts think the operatives would have to step up several levels in sophistication to do lasting damage to the Saudi industry, which has built in lots of backup systems. "There are always ways to create temporary disruptions, but most of the high-capacity links are redundant and repairable. It would take a very persistent pattern of attack to interrupt oil for awhile," says Anthony H. Cordesman, a Gulf security specialist at the Center for Strategic & International Studies in Washington. Cordesman thinks the oil market is overreacting to the Saudi situation. In fact, analysts estimate that there is an $8 to $10 risk premium in the current $40 per bbl. price.

Inside Saudi Arabia, the situation looks less dire than it appears to an anxious world. Saudis say the extremists are a small and isolated force, whose tactics are draining away what support they once had. "Their number has substantially decreased. But the less there are the more dangerous they are -- like a wounded tiger," says Mohsen al-Awajy, an Islamic activist in Riyadh.

Still, continued instability could do damage. The Saudi economy and the oil industry would suffer if a mass exodus of expatriates occurred. That would deprive the industry of technical knowhow, making it harder for the Saudis to boost capacity. While it hasn't happened so far, Western executives are moving their families to Dubai, and they could abandon the kingdom entirely if the attacks intensify.

Worried Westerners have little doubt that more horrors are in the offing. Speaking of the militants, an oil executive in Riyadh says: "They are professionals; they change tactics; they adapt." The extremists will certainly have relished the impact of their recent forays into the kingdom's oil regions. The sternest tests for both the Saudis and the oil markets may still be to come.

By Stanley Reed in London, with Stephanie Anderson Forest in Dallas and Peter Coy in New York

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