6 A F I N A N C I A L T I M E S W e d n e s d a y 1 8 S e p t e m b e r 2 0 1 9
economy is less exposed to oil price
swings than before, a downturn in China
— a net oil importer and big loser from
price rises — has a big impact on the
economies of trading partners and so on
global growth.
Jennifer McKeown of Capital Eco-
nomics, the consultancy, cautioned that
if prices were driven higher by an esca-
lation in Middle East tensions, “benefits
for some oil producers would have to be
set against the severe costs of conflict
for others”.
Even without a big regional flare-up,
the heightened risks of conflict would
“add to a host of reasons to feel uncer-
tain about the global outlook” that were
already weighing on business confi-
dence and holding back investment
across advanced economies, she said.
Central banks will be wary that a
persistent rise in oil prices would
undoubtedly push up inflation. But
policymakers in developed economies
would usually view this as temporary
and be unlikely to change their stance.
For the Fed and ECB, both battling
to bring stubbornly low inflation up to
target, higher energy prices might even
have some welcome effects, if they led
households and businesses to expect
higher inflation in future and act
accordingly.
But for central banks in some emerg-
ing economies — notably Turkey, where
investors already doubt policymakers’
resolve to bring inflation under control
— the challenge would be bigger.When the price of oil collapsed in
2015, so did US business investment,
largely because of a sharp fall in the
number of rigs operating in Texas and
North Dakota.
A 2018 analysis by the Kansas City
Federal Reserve showed enough of the
US economy was linked to oil that high
crude prices encouraged even busi-
nesses outside the energy industry to
buy new plants and gear.
Petrol prices are still a big political
concern for any US president since con-
sumers dominate in many swing states.
But a rise in oil prices is no longer neces-
sarily bad for the overall health of the US
economy.
But for global growth, the rise repre-
sents bad news. Although the damage
suffered by oil-importing economies
after a price surge is usually offset by
the boost to oil producers, the counter-
balance is only partial since they tend to
save part of the gains. While the USan economist at Berenberg, noted that
an increase of €10 per barrel generally
adds 0.3 percentage points to eurozone
consumer price inflation within two
months, with a similar effect on con-
sumers’ disposable income.
“For countries that are hovering on
the brink of recession already, this could
make the difference between stagnation
or a mild contraction,” he said, pointing
to Germany and Italy.
However, even the oil-importing
eurozone is better able to withstand
higher prices than it was in the past.
Both consumption and production have
become less oil-intensive, with growth
driven increasingly by services, and
labour markets are in better shape.
The European Central Bank said last
year, when oil was about $75 a barrel,
that stability at that level would have lit-
tle effect on real incomes or consump-
tion. The biggest losers would be large,
oil-importing emerging economies such
as Turkey and Argentina, already in a
fragile state and ill-equipped to deal
with even a temporary rise in inflation.
The US position used to be clear-cut:
any rise in petrol prices hit GDP rapidly
through its effect on consumers. For
that reason, the US has kept an oil
reserve since the 1970s to smooth out
price surges in global oil markets.
However, since the shale boom, the
price of oil has driven growth in the US
through a different channel: the money
companies invest in new plants and
equipment.D E L P H I N E ST R AU S S— LONDON
B R E N DA N G R E E L E Y— WASHINGTON
The sudden surge in the oil price could
not have come at a more inopportune
time for the global economy.
Global manufacturing is in the dol-
drums, the US-China trade conflict is
unresolved and some big economies are
on the verge of recession. A sustained
increase in oil prices would be more bad
news for global growth.
Economists say the attack on Saudi
Arabia’s crude oil processing facility at
Abqaiq, which caused the biggest intra-
day rise in oil prices since 1991, could do
significant damage to the global econ-
omy if the increases last more than a few
months. A lot is riding on how long the
disruption to Saudi oil production lasts
— and the extent to which the gap can be
filled by stepping up output or drawing
down inventories elsewhere.
Some countries are more exposed
than others, and rising geopolitical ten-
sions will add to uncertainties already
weighing on business investment.
When a price surge is caused by a
shock to supply, it acts in effect as a tax
on consumers of oil, hitting gross
domestic product in countries that are
net oil importers. Holger Schmieding,
The cost of these defences is inflated
by their relative scarcity. “These sensors
are made by very few people in very
small numbers,” Mr Gill said.”
Saudi Arabia has a vast number of tar-
gets — oil refineries, desalination facili-
ties, air ports, military air bases, and
religious sites such as Mecca — spread
over a huge area. Effective protection on
the scale of Abqaiq, which spans several
kilometres, is almost impossible.
“There is no technologically perfect
solution,” admitted Mr Saab, who said
his former Pentagon bosses were at a
loss over how to manage the prolifera-
tion of drone warfare.
He compared the defence gap to the
threat faced by US forces from impro-
vised explosive devices after the Iraq
invasion.
Mr Saab said worse is to come. “They
[the militias] are only just scratching
the surface of what drones can do.” He
warned of drone swarms, flight path
manipulation, and masking of radar sig-
nals. “This is the tip of the iceberg.”
Notebookpage 10;Lexpage 12covered in plastic sheeting, the wings
and tails from expanded polystyrene.
He described Iranian-designed dro-
nes made in Yemen by Houthi groups on
3D printers, fitted at the last minute
with Iranian electronics. “These are not
particularly sophisticated,” he added.
Anti-drone defence infrastructure is
expensive, including GPS jammers to
neutralise drone navigation, search and
track facilities to identify incoming
drones, and missile and radar-guided
canon interceptors to destroy them.
Richard Gill, managing director of UK
companyDrone Defence, is in discus-
sions with Aramco. “I would be looking
at multiple layers of sensing technol-
ogy... radars, cameras, microphones,
radio-frequency scanning technology,
electronic warfare and then the full
range of countermeasures that go with
that,” he said.
“But it’s military-grade technology
and it’s massively expensive. To install a
defensive system is extremely complex
and the threat is evolving at such a rate
that it’s very hard to keep up to date.”shot down an explosives-laden Iranian
drone as it flew over the Sea of Galilee. In
August, Hizbollah, the Iran-allied Leba-
nese militant movement, accused Israel
of using a drone to strike its media office
in Beirut. Iraq, Saudi Arabia and the
UAE import drones from markets such
as China; meanwhile Israel, Iran and
Turkey manufacture their own.
The Middle East is particularly vul-
nerable to drone attacks “as it has a lot
of centralised economic assets which
are critical”, said Jack Watling, a resear-
ch fellow in land defence at London’s
Royal United Services Institute. “Their
countries are dependent on oil and have
relatively badly-protected installa-
tions,” he said, adding it was a target-
rich environment with conflicts occ-
urring across large parts of the region.
The asymmetry between strike and
response is notable. Israel has used US-
built Patriot missiles costing $3m-$4m
to fell quadcopter drones costing about
$1,000. Mr Watling’s research has un-
covered details of Syrian opposition
forces making drones from plywoodH E L E N WA R R E L L— LONDON
A ND R E W E N G L A N D A N D
A H M E D A L O M R A N— RIYADH
Long before the attack on Saudi Arabia’s
oil facilities that knocked out half of its
oil production, the kingdom knew it was
vulnerable to assault from armed
drones. Houthi rebels in neighbouring
Yemen have often used this new aerial
weapon, alongside missiles, to target
Saudi airports, desalination plants and
crude facilities in the past 18 months.
The rising threat has prompted
numerous Saudi agencies — fromSaudi
Aramco, the state oil company, to air
defence, ports and civil aviation author-
ities — to scout the US and Europe for
adequate defence systems, said one
defence industry executive.
“They’ve been in a panic [over
drones] since the new year,” the execu-
tive said. “It’s come down from the top —
protect the nation. If you tell me [your
system] can do it, get it here now.”
Details of last weekend’s attacks on
Abqaiq, a crude processing centre, and
the Khurais oilfield, remain murky: on
Sunday, Houthi rebels said they had
used 10 drones to conduct the assault.
But Washington has blamed Iran, which
is accused by the US and Saudi Arabia of
smuggling arms to the Houthis, includ-
ing missiles and drones.
US media reported that US intelli-
gence indicated most of the strikes were
launched from the Islamic republic and
could have involved missiles. A US offi-
cial told the FT yesterday that intelli-
gence indicated the strikes also included
long-range weapons, raising the possi-
bility of cruise missiles. Saudi Arabia
has not yet backed up such claims. Iran
has denied any involvement.
Either way, armed drones have bec-
ome the latest weapon of choice across
the Middle East; and as tensions bet-
ween the US and Iran have stepped up,
the Iranian-aligned Houthis have esca-
lated attacks across Saudi Arabia’s
southern border.
The cheap, nimble weapon that can
easily evade air warning systems is pos-
ing a novel defence challenge for the
world’s largest oil exporter — also one of
the world’s biggest arms buyers — and
other countries in the region. “This is
the advent of 21st-century drone war-
fare in the Middle East,” said Bilal Y
Saab, director of defence and security at
the Middle East Institute in Washington,
and a former adviser at the Pentagon.
“The advantage is to the adversary,
because our responses are not efficient.”
Last month, the Houthis were blamed
for a drone attack on Shaybah oilfield in
eastern Saudi Arabia and in May the
rebels claimed they had used drones to
attack Saudi oil-pumping stations and a
vital pipeline deep inside the kingdom.
Saudi Aramco, which operates
Abqaiq, asked defence contractors this
year if they could deliver a deterrent for
drones, and is still in talks with the
industry about new technologies.
The Israeli military last year said it
I N T E R N AT I O N A L
Saudi Arabia attack signals growing
threat of drone warfare in Mideast
Region’s states are struggling to counter cheap and rapidly evolving weapons that can evade detection
Defence test:
Houthi drones
at an unknown
site in Yemen in
July. Anti-drone
infrastructure is
expensive, say
experts, and
needs updating
constantly
Houthi Media Office/ReutersEnergy.International impact
Global economy takes a hit at a bad time
Sources: Center for the
Study of the Drone;
MoD; companies; FT researchAcoustic Detect, identify and track drones by the sound of
their motors or their acoustic signature as they pass through
the airInfrared Identify and track drones by their infrared (heat)
signatureElectro-optical Converts visible light to electronic signals,
enhancing human eyesightRadio-frequency Scan for the radio frequencies on which
drones operate as a way to pinpoint drones and operatorsRadar Analysis of reflected radio waves to detect, identify
and track dronesAcoustic Detect,
identify and
track drones by
the sound of
their motors or
as they pass
through the airInfrared Identify and
track drones by their
heat signatureElectro-optical Converts visible light to
electronic signals, enhancing human eyesightRadar Analysis
of reflected
radio wavesDrone hunting systems
Radio-frequency Scan for frequencies
to pinpoint drones and operatorsMini-diagram here‘They [the
militias] areonly just
scratchingthe surface
of whatdrones can
do... Thisis the tip of
the iceberg’Extent of damage depends
on time it will take to restore
kingdom’s production
Oil swing: the US is less exposed to
price volatility than in the pastF T R E P O RT E R SSaudi Arabia sought to reassure the oil
market yesterday that it could keep
customers well supplied despite
attacks on its facilities, sending crude
prices sharply lower and reversing part
of the rise.The country’s crude production was
cut by more than half at the weekend
by strikes on its Abqaiq oil processing
facility and a big oilfield, sending
prices up by as much as 20 per cent
onMonday.
People briefed on the extent of the
damage at Abqaiq, which processes
more than 70 per cent of the country’s
normal output, have warned that it
could take months before full produc-
tion is restored.
But oil fell sharply yesterday — down
more than 7 per cent — after Prince
Abdulaziz bin Salman, energy minister,
said Saudi Arabia had restored half of
the lost production and would fully
restore output by the end of September.
Brent crude fell as much as $6.
a barrel after his comments to $63.
a barrel, before recovering to near
$65 a barrel.
US benchmark West Texas Interme-
diate lost $3.40 to $59.50 a barrel.
Four people close to the energy minis-
try cautioned, however, that the energy
minister’s statement was optimistic and
did not fully account for the severity of
the damage at the facility, and appeared
to contradict earlier guidance.
One of the people said full repairs
were still expected to last until at least
the end of October and that the assess-
ment included utilising oil held in stor-
age by the country, rather than a swift
resumption of such a high percentage of
the lost output.
Another person said the report was an
attempt by Riyadh’s officials to calm the
market by presenting a rosier outlook,
fearing that the US and its allies could
flood the market with their emergency
oil reserves.
Part of the positive messaging could
be linked to the wish of Crown Prince
Mohammed bin Salman, the country’s
de facto ruler, to push ahead with the
planned stock market listing of state oil
company Saudi Aramco, they said.
Yasir Rumayyan,Saudi Aramco’s
chairman, said at yesterday’s press con-
ference that Saudi Arabia remained
committed to the initial public offering,
though the timing appears to have
slipped to within the next 12 months
rather than by the end of the year.
A US official said the administration
of President Donald Trump had
concluded that the assaults included
long-range precision-guided systems
that hit the targets from the north-west,
a finding which Saudi intelligence has
not yet backed up but which could pave
the way for retaliatory measures from
the US.
Reporting by Andrew England in Jeddah,
Anjli Raval and David Sheppard in London,
and Demetri Sevastopulo in Washington
Marketspage 25Production
Oil price falls
after Riyadh
reassures on
crude supplies
DA N I E L D O M B E Y— MADRIDSpain was heading yesterday for early
elections after opposition parties
spurned the ruling Socialists’ calls to
allow the formation of a government.On a frenetic day of talks Pedro Sánchez,
the caretaker prime minister, called the
other main party leaders to see if he
could win the backing of parliament to
form a minority government and so
avoid an early general election.
But the radical leftwing Podemos
grouping said it would abstain in a par-
liamentary vote, while the pro-market
Ciudadanos party said it was set to vote
against Mr Sánchez.
The responses appeared all but cer-
tain to render irrelevant a round of for-
mal consultations between King Felipe
and party leaders, which concluded
with a meeting with Mr Sánchez yester-
day evening.
Albert Rivera, the Ciudadanos leader,
said Mr Sánchez appeared set on new
elections and was rejecting approaches
from both the left and his own grouping.
Spain will hold a general election on
November 10 — its fourth in four years
— unless the king convokes another
round of votes to install a new govern-
ment and Mr Sánchez cobbles together
a majority by Monday.
The Socialists have 123 seats in the
350-member chamber of deputies.
They would not be able to form agovernment if the 42-strong Podemos
abstains and Ciudadanos and centre-
right Popular party vote against.
According to people close to the two
left-of-centre parties, Mr Sánchez spoke
yesterday to Pablo Iglesias, the Podemos
leader, who said his party would abstain
unless it was admitted into a coalition
with the Socialists. The prime minister
has ruled out such an option.
Mr Sánchez was also involved in a
bad-tempered exchange with Mr Riv-
era, who accused the prime minister of
telling a “collection of lies” and con-
firmed that his party was set to vote
against the formation of a Socialist-led
government.
Mr Rivera had previously proposed
that Ciudadanos abstain in a vote, if Mr
Sánchez met three conditions: ruling
out pardons for Catalan separatist lead-
ers on trial for charges including sedi-
tion and rebellion; a promise not to
increase taxes on the middle class; and a
new coalition government in the Nav-
arre region.
In a letter, Mr Sánchez argued that he
had substantially met these conditions,
a response that Mr Rivera depicted as
dishonest.
“There is a lot of last-minute manoeu-
vring because everyone wants to show
they have done what they can to avoid
new elections,” said Pablo Simón, pro-
fessor of politics at Madrid’s Carlos III
university.General election
Spain heads to polls after PM’s
talks with opposition collapse
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