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The Saudi oil shock: a symptom of a much bigger economic risk

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Drones costing just a few thousand dollars have caused the biggest disruption to global oil markets in modern history, with potentially significant implications for the global and Australian economies at a time when they are least prepared. But the attack on the Saudi refinery in Abqaiq also highlights a much more significant and underappreciated risk to the global economy, a collapse in the world's highly integrated supply chains, which some argue could be the cause of the next downturn.

US secretary of state Mike Pompeo (left) and US ambassador to Saudi Arabia John Abizaid (right), shown here with Saudi foreign minister Ibrahim Al-Assaf prior to discussions about the September 14 drone attack. Picture: Ron Przysucha/US State Department

The attack sent global markets reeling. Saudi Arabia's oil production halved, the world's oil supply fell by 6 per cent, and oil prices rose by 20 per cent. And the longer-term impact could be substantial: spikes in the price of oil have played a leading role in both US and global economic downturns at least once every decade since the 1970s. To avoid that happening again, countries will need to avert a geopolitical conflict and come up with an extra 5.7 million barrels of oil each day until Saudi supplies are up and running again.

There are a few places where those barrels could come from. The United States and other members of the International Energy Agency (except Australia, which consistently breaches its obligations under the IEA treaty) have oil reserves equal to 90 days of their imports. But they'd prefer not to use them. Another option is for the rest of OPEC - the Organisation of the Petroleum Exporting Countries - to increase supply. As oil exporters, they might enjoy having temporarily higher prices, but they've also been........

© Canberra Times