U.S. gas prices could rise by 25 cents a gallon due to attacks on Saudi oil, expert says

Attacks on crucial Saudi Arabian oil installations crippled the world’s second-largest oil producer and sparked new geopolitical tensions — but how much pain consumers feel will hinge on how long it takes normal output to return, experts say.

The weekend drone strikes marked the biggest disruption to Saudi Arabia's oil industry since the early 1990s, but if crude stockpiles can tide over global markets and production bounces back quickly, the episode will have a negligible effect on pump prices.

Should the recovery take weeks or months, though, the impact could be far-reaching. Higher fuel prices can not only motivate consumers to cut spending elsewhere but also ultimately reach into virtually every corner of the economy. Airlines, cruise ships, trucking, railroads and retailers all will feel the pinch of higher fuel prices.

State-run Saudi Aramco churned out 9.85 million barrels per day in August, according to the U.S. Energy Information Administration. But Saturday's attack on an oil processing plant and nearby oil field forced the kingdom to suspend production of 5.7 million barrels of crude, or nearly 6 percent of the 100 million barrels the world consumes each day.

The situation weighed on Wall Street, pushing the Dow Jones industrial average down more than 165 points before the benchmark index recovered somewhat. The Dow closed down 142 points, or about 0.5 percent, finishing the day at 27,076. The Standard & Poor's 500 and tech-heavy Nasdaq composite closed down about 0.3 percent each. The S&P index closed at 2,997. The Nasdaq closed at 8,153.

The Saudi company initially said it hoped to restore a third of that lost production — about 2 million barrels — by Monday, and it has given no timetable for a full recovery. The prospect of tightening supplies sent energy stocks higher as oil prices jumped about 13 percent, one of their strongest days in years. Brent crude futures were selling at $68 per barrel around 4 p.m. on Monday; U.S. West Texas intermediate was trading at more than $61 per barrel.

Shares in the big international oil companies — known as the supermajors — climbed on global markets. U.S. petroleum giant ExxonMobil advanced 1.5 percent, to $73.73; Chevron finished at $124.12, up more than 2 percent; while BP spiked nearly 4 percent, to $39.35. Companies that service and supply the supermajors and Middle East producers were up even more. Schlumberger Limited jumped 5.3 percent, and Halliburton leaped 11 percent on expectations of more business following the attacks.

"The Schlumbergers and the Halliburtons supply the equipment for the drilling, so if we have a big supply disruption like we have now, they are going to have to do the drilling and probably the repairs," said Bill Selesky of Argus Research. "That's why those two are both trading up pretty good today."

Consumers could be looking at a 10- to 25-cent increase in gas prices in the coming weeks, said Ed Moya, an analyst with OANDA. Though such a jump would be relatively modest, it would come at an unwelcome moment, threatening the U.S. economy's most powerful engine amid mounting fears of a slowdown.

"All the sentiment indicators have been softening, and any pressure on the consumer could derail the case for higher equities we've seen in recent weeks," Moya said.

Consumer spending powers about 70 percent of the U.S. economy, and retail sales rose in August, even as other key economic indicators weakened under the weight of the trade war with China.

The U.S. manufacturing sector contracted in August for the first time since 2016, and the Commerce Department recently revised second-quarter economic growth estimates because growth had slowed more than previously thought. Meanwhile, constant trade tensions and signs of a slowdown are sending investors into the bond market in droves.

Falling demand had sent gas prices lower after Labor Day, so consumers should be able to bear a short-term surge in prices more easily. On Monday, the average price for a gallon of gas in the United States was $2.56 according to AAA, about 28 cents lower than a year ago.

"Oil price spikes due to geopolitical crises in the past have had a depressing impact on U.S. consumers when they filled up their tanks," said Ed Yardeni, president of Yardeni Research. "It costs them a few more bucks when they fill up, and so consumers hunker down and cut spending in other areas. That hurts the economy."

Despite Monday's oil price spikes, prices are a long way from hitting records. In June 2014, the price of oil was $105.40 per barrel. Since then, oil prices have declined, and the energy sector index of the S&P 500 has dropped along with it. The S&P energy index on Monday afternoon was up 3.6 percent, which is one of its best days of the year but still down more than 36 percent since June 2014, according to Howard Silverblatt of S&P Dow Jones Indices.

Moya estimated that an increase would last a month or so, provided that political tensions ease and there are no further attacks. Officials have said Saudi Arabia's oil stockpile will allow it to meet export obligations for several weeks while Aramco recovers, and OPEC and Russia are holding off on unleashing additional supplies for now despite the magnitude of disruption.

Aramco is reportedly considering a delay in its initial public offering until production returns to normal.

"I don't think even Aramco's limited listing on the Saudi stock exchange can withstand this event," said John Kilduff of Again Capital. "This attack is a material adverse change to the company. They are going to have to do a lot more risk disclosure in their IPO document as it relates to Iran and the region."

If Saudi production doesn't recover quickly, there will be implications for other consumer travel costs. In 2018, the global airline industry spent $180 billion on fuel, accounting for 23.5 percent of operating expenses, according to the International Air Transport Association.

"The hardest hit on this price surge is the cruise ships and the airlines," Moya said. "I think you'd see bit of a waiting period, but those costs would be passed on. You're definitely going to see that weigh on the consumer."

Cruise line Carnival, United Airlines and Delta Airlines all finished down on the day.

On Sunday, President Donald Trump announced via Twitter that he had authorized the release of a yet-unspecified amount of crude oil from the Strategic Petroleum Reserve to "keep the markets well-supplied." The 600-million-barrel reserve is tapped only in extreme circumstances, and it takes 13 days for SPR oil to hit markets after a presidential decision.

"Make no mistake: The loss of more than 5 percent of the world's supply is a supply emergency," said Bob Tippee, chief editor of Oil & Gas Journal. "There have been withdrawals for far less strenuous reasons."

The United States was both the world's largest producer and consumer of oil in 2018, according to the U.S. Energy Information Administration. In a tweet Monday, Trump insisted the United States wasn't reliant on Middle Eastern oil but would unleash its reserves to help allies.

"Because we have done so well with Energy over the last few years (thank you, Mr. President!), we are a net Energy Exporter, & now the Number One Energy Producer in the World," Trump tweeted. "We don't need Middle Eastern Oil & Gas, & in fact have very few tankers there, but will help our Allies!"

Kilduff said the United States is not a net exporter of crude oil, but total energy exporter could mean something else.

“We are not a net exporter of crude oil,” Kilduff said. “You would have to include all matters of other petroleum products to come to the conclusion that we are a net energy exporter.”