World oil prices rose sharply this week as Saudi Arabian jets struck rebel targets in Yemen, sparking supply fears in the crude oil rich Middle East. Here in Pakistan we are disturbed over the PM offering up the military to the Kingdom in the fashion of an African dictator, but the effects of the Yemen crisis will shake oil prices, something we need to prepare for. Iran is pushed into a corner and Saudi Arabia seems to be looking for the opportune moment to crush Iranian fantasies of a global empire. Yemen is one location of a proxy war, and Pakistan already another.
Though oil supply hasn’t been disrupted yet, the market has fallen just due to expectations in the wake of the Yemen crisis. Air strikes sparked fears of disruption so to avoid any aftershocks, Riyadh announced strengthening not only security at borders but also around oil and industrial facilities. Kuwait too has boosted security around its oil sites. This is one sector where the Kingdom has to play the game carefully. Remember that Iran is also a huge exporter of oil, and sanctions have played havoc with its economic gains and an all-out war will impact the global market. Is this the end of Arab oil? The US is still riding out its oil boom and there is a supply glut that has allowed for the global shock from Yemen to be softened. The collapse of oil in the Gulf, will be good for US producers, changing the face of the political economy of oil as we know it.
Yemen is not a big oil producer but it’s strategic location contributes to market reaction. The passage between Yemen and Djibouti, known as Bab el-Mandeb, is less than 40 kilometers wide, and considered by the US Energy Information Administration (EIA) to be a “chokepoint” for global oil supplies. The closure of the two-mile strait would force tankers to sail around the southern tip of Africa to reach European, North American, and South American markets, drastically increasing costs. Egypt has sent naval vessels to help secure the passage and the Houthis don’t have a strong maritime presence, so it should all be okay.
Pakistan has not been able to manage oil shocks well in the past. This will be no different. The sleeping giant, the Petroleum ministry, better be keeping a close watch on oil prices, before we have to, literally, pay the price. The brunt is always on the consumer.