The attack on the Saudi oil production facility at Abqaiq over the weekend will temporarily remove roughly 5.7 million barrels of oil production per day, or about 5% of the total global supply. The price of global benchmark Brent Crude rose 14.25% on Monday, while West Texas Intermediate was up 14.38%. Saudi oil accounts for approximately 12% of global production. The flow-through of the price shock in oil markets will result in a 15% increase to American retail gasoline prices in coming days, based on movement in wholesale gasoline prices following the geopolitical event.
The broader impact on the domestic economy will be modest. We expect a transitory increase in the Consumer Price Index and personal consumption expenditure deflator in coming months followed by correction, once the Saudi oil production facility comes back on line. However, we are somewhat concerned about the risks around manufacturing outlook, given the reliance of many old-line manufacturers on imported oil, in addition to the effects of rising tariffs.
Each oil crisis in the Middle East is different and the domestic policy matrix right now is not conducive to the interests of U.S. manufacturers. Thus, in contrast to the rise of oil prices toward $146 per barrel 11 years ago, we are far more worried about the manufacturing sector than we are about U.S. households at this time.
While the Saudis will get some production back up and running in coming days, it will be months before the prior production level can be attained, given the extent of destruction at the facility. At this time, our expectation is that there will be roughly 3 million to 4 million barrels of production off line through the end of the year. To put the initial 5.7 million barrels of lost production in perspective, the 1973 Arab-Israeli war and ensuing oil embargo, and the Iraqi invasion of Kuwait, both knocked off 4.3 million barrels a day of production and are widely blamed for triggering large enough supply shocks to knock the U.S. economy into recession.
As long as the geopolitical situation on the ground does not change, we do not expect the supply shock to spur a recession at this time. The United States is basically energy independent, and over the past 20 years has shifted toward more fuel-efficient vehicles and cheaper natural gasoline, as well as becoming an exporter of energy. Moreover, as energy prices climb, capital expenditures by the energy sector tend to increase, offsetting reductions in household expenditures, and having little impact on domestic growth. With the United States far less energy dependent than it was in 1973-74, or 1991, a far greater supply shock in the global oil market would be necessary to send the U.S. economy into a recession.
