Saudi Arabia has closed a critical oil pipeline after it was attacked by drones launched from Iraq, as conflict in the Middle East widens.
Iraq said it had fired a military commander and launched an investigation after admitting the drone attack on its neighbor’s East-West pipeline had originated in one of its provinces bordering Iran. Saudi Arabia has previously accused Iran-backed militia in Iraq of targeting its oil facilities. The 1,200km (745 mile) pipeline has helped Saudi Arabia bypass the Strait of Hormuz.
The incident comes amid a major advance by the Iranian-backed Houthi rebels in Yemen, putting more pressure on global oil shipping routes as the US-Iran war stretches into its seventh month. On Friday, Yemen’s Saudi-backed government forces said they had struck Houthi fighters in the strategic coastal city of Mokha, a day after the Houthis seized control of the entire Red Sea coast.
Riyadh on Friday said it had shut the pipeline as a precaution, as satellite images of scorched ground and smoke near the site emerged. The Saudi pipeline has been moving 4% to 5% of global oil supply, news agency Reuters has reported, citing ship tracking companies and analysts.
Saudi Arabia has said the kingdom would “support the efforts of the Iraqi government” to “prevent attacks” launched from the country against neighboring states.
This week, a lightning advance in Yemen has also seen Houthi militants seize control of much of the country’s coastline, sources say. The group said it had control of the Bab al-Mandab Strait, the gateway to the Red Sea and the Suez Canal, though it said maritime navigation is “safe for all companies except for Saudi vessels.”
The developments have squeezed both sides of the Arabian Peninsula, pushing crude oil prices to over $100 a barrel for the first time since July. Fears over inflation have risen with the spike in energy prices, further pushing up government borrowing costs.
Richard Bronze of Energy Aspects told the BBC that even before the latest escalation, diverting Saudi oil via the Suez Canal into the Mediterranean and around Africa was already adding 30 days to sailing times and increasing transportation costs.
“The buffers that have helped the oil market manage the crisis so far are mostly gone. So, oil prices will keep rising if both crises continue,” he said.
Challenges were particularly acute in diesel markets, he said, where prices have already reached record levels that would in turn push up the costs of a range of goods as diesel is widely used in manufacturing and transportation.
“Unless the situation across the Middle East improves, crude oil prices are likely to return to the peak of $120 per barrel seen earlier in the Iran war and could go even higher,” he said.
IAM Member Impact: With one strait nearly closed and the other open at the gatekeeper’s decision, members should consider very carefully whether to attempt these routes. Additionally, members should expect the price of diesel to increase, and prepare to be transparent about costs with clients.