In this episode of our BryghtCast edition of the Managing Uncertainty Podcast for the week of September 16th, 2019, Bryghtpath Principal & CEO Bryan Strawser and Consultant Bray Wheeler take a look at two current risks and upcoming events:
- WSJ: US, Saudi Military Forces Failed to Detect Attack on Oil Facilities
- NY Post: Satellite photos of Saudi oil strikes show surgical precision
- National Hurricane Center: Five-Day Graphical Tropical Weather Outlook
Bryan Strawser: Hello, and welcome to the Managing Uncertainty Podcast, BryghtCast Edition for the week of September 16th, 2019. This is Bryan Strawser, principal and CEO here at Bryghtpath.
Bray Wheeler: This is Bray Wheeler, consultant at Bryghtpath.
Bryan Strawser: So we’ve had a couple of weeks without a BryghtCast episode just due to some business travel, and vacation, and other events that went on. But we’re back.
Bray Wheeler: We’re back.
Bryan Strawser: And we’re back just in time for one of the more interesting dynamic events that have happened over the course of the year. Just about 36 hours ago, there was an attack on Saudi Arabia’s oil production and refining facilities inside Saudi Arabia. Boy, are there rumors flying about this particular situation?
Bray Wheeler: Oh, yeah.
Bryan Strawser: It appears that the story, at least from Saudi Arabia and the United States, is that this was an attack executed by Iran on Saudi’s oil production and refinery capabilities. It was initially reported as drone strikes, and then there was new reporting last night, Sunday evening, that indicated that this was a combination of drone strikes and cruise missiles fired from Iran. The Saudi has come out today, Monday the 16th, saying that these attacks were not originated inside of Yemen. So I think all signs indicate that these came across the Gulf from Iran. Is that what your understanding is?
Bray Wheeler: Yeah, that’s my understanding as well based on the news reports and then looking at the map, it’s well within… These facilities that were attacked and infrastructure that was attacked is well within kind of the zone for Iran to be able to launch a cruise missile, certainly.
Bryan Strawser: As we’re recording this episode here on Monday morning the 16th, you’re going to hear it on Tuesday the 17th, the United States just in the last few minutes has released satellite imagery showing what they’re claiming is evidence backing the allegation that Iran was behind the attacks on major oil production facilities in Saudi Arabia.
Bray Wheeler: Yeah, they had kind of hinted at that yesterday hoping to be able to get it declassified enough that they could release it. So I’m not surprised that they’ve been able to push that through here this morning.
Bryan Strawser: So there’s some impact here, obviously, that’s going to happen. Some of which has happened, I think we should point out. The first is just the oil market. Let’s talk a little bit about that. The oil price this morning has seen the biggest one-day rise since the 1991 invasion of Kuwait. Oil prices rose 20% this morning in early market trading, and they have since fallen back. The international benchmark used in oil trading is the Brent crude price, which went up to 71.95 a barrel earlier today before dropping back. It was at about $50 a barrel before the attacks, before the markets opened today, the first day of trading since the attacks have occurred. Traders are saying that the prices eased primarily because President Trump has authorized the release of oil from the United States Strategic oil reserve in order to balance out the impact of the attack on the market.
Bray Wheeler: Yeah. I mean, what’s happening really is kind of based on the infrastructure that if whatever was attacked, whomever… I shouldn’t say whatever was attacked. Whoever attacked the infrastructure in Saudi Arabia that produces this stuff, they weren’t taking out just pieces here or there that’s kind of easily repairable, replace a pipe, divert to a different facility. They hit kind of a jugular as was described by the senior fellow for energy at the Council on Foreign Relations, Amy Myers Jaffe. Hope I’m pronouncing that right. She had posted on Twitter yesterday kind of a long explanation of kind of what all this means, and essentially the strike that was made was the type of strike that you would make at the outset of a conflict.
Bray Wheeler: Hit a jugular facility, which was their gas-oil separation plant. There’s not a whole lot of those in Saudi Arabia. So taking that out has a very big impact on Saudi Arabia’s ability to be able to send through crude oil, send through natural gas, send through gas because really that facility is responsible for taking all of the crude oil that Saudi Arabia is posting with all of its imperfections, and impurities, and different things that are mixed in with it and being able to separate all those things out into the distinct kind of consumables that they’d be able to send out. So by hitting that and some of the other infrastructure, they really significantly damaged Saudi Arabia’s ability. It wasn’t just a kind of a tit for tat attack. This was a direct strike, whoever it was, on a pretty key piece of infrastructure within Saudi Arabia’s oil infrastructure.
Bryan Strawser: The BBC reports this as the largest oil processing plant in the world. It is run by Saudi’s state oil company, which the Saudis this morning that they made delay the IPO of their state-owned oil company, which I’m sure was going to be a boon for them in terms of capital investment in the country and thus to the royal family. To your point about this being the jugular, so to speak, as Amy was describing it from the Council on Foreign Relations, this is the largest oil processing plant in the world.
Bray Wheeler: Yep.
Bryan Strawser: If you look at the satellite imagery the United States released this morning, I mean the attack, pretty significant damage that occurred. The stuff’s not that stable either in terms of it’s not overly resistant to attacks, and fire, and bombing, and that kind of thing.
Bray Wheeler: Just not naturally. I mean, you could have the best set up probably system in the world and it’s still going to be kind of susceptible to that kind of stuff. It’s just, I mean, you’re dealing with highly flammable-
Bryan Strawser: Material. Yeah.
Bray Wheeler: … material.
Bryan Strawser: So the core of this conflict is a regional power competition between Saudi Arabia and Iran. They’ve been bitter rivals going back for decades.
Bray Wheeler: Mm-hmm (affirmative).
Bryan Strawser: It’s exasperated by significant differences in interpretations of religion between the two. We often talk, at least in the counter-terrorism discussions, about the influence of more radical elements of Islam. But this is literally one sect of Islam against another sect of Islam, both of whom happened to be the two regional dominant powers, for the most part, militarily and economically in the Middle East between the two.
Bray Wheeler: And responsible for a lot of the smaller proxy factions that operate around the globe. They really kind of fund and/or administer [crosstalk] else.
Bryan Strawser: Iran is largely a Shia Muslim country. Saudi is primarily a Sunni Muslim country, and thus the core of the conflict, which of course goes back to the founding of Islam and original differences of opinions that led to the two principles sects of the religion. To your point, the two countries, they’ve been engaged in a variety of proxy conflicts for decades throughout the region. You saw some of that play out in the United States’ time in Iraq. There were very much elements of Iranian proxy war going on that led to the rise of ISIS as elements of that.
Bray Wheeler: Well, kind of funny enough, some of that was embraced by the U.S., some of the Iran interference because they were taking on ISIS.
Bryan Strawser: Yes, correct.
Bray Wheeler: They were combating some of the more extreme elements of kind of the Sunni side of that religion, those extremes. But then also, the U.S. and Saudi Arabia have been very close regional allies for quite some time too, even-
Bryan Strawser: Many decades.
Bray Wheeler: … the countering force to Iran.
Bryan Strawser: Well, and the whole conflict in Yemen that’s going on between the two sides is, again, this is a proxy war between Saudi and Iran. The reasons Saudi entered the conflict was to counter Iranian influence in Yemen that had been going on for some time.
Bray Wheeler: Well, originally, they thought this attack kind of originated from Yemen as part of the Iranian-backed rebels so it wasn’t-
Bryan Strawser: Now they’re saying it’s not-
Bray Wheeler: … kind of an overt attack from Iran, that it was through the rebels. And now, they are saying that’s not the case that they have evidence to suggest that it was directly from Iran.
Bryan Strawser: So the danger here for businesses, as we kind of explain what’s going on, Saudi’s a place that lots of U.S. businesses do business, have facilities, particularly in oil, and gas, defense, and aerospace, intelligence, and other sectors of the United States’ economy. And there are lots of other businesses from other countries that operate there too. So the challenge here is now we have military conflict done on a smaller scale between two regional powers. So the disruption we’ve talked about previously in the Middle East, this just exasperates that situation. Apparently, we have cruise missiles flying over the Gulf from one country to the other.
Bray Wheeler: Yeah. I mean, as I mentioned before, taking this step… I mean, this attack is the type of attack you conduct during a direct military engagement. On the onset of war, this is a first-strike target within Saudi Arabia. That would be what opposing forces target. So to have that escalation to have that direct hit. Now, probably not super populated, so there’s not a tremendous loss of life, but the economic impact is globally pretty substantial at least for the time being. I think just the region, and you alluded to a lot of the U.S. business going on in Saudi Arabia, there’s a lot of even regional business that’s going on. This is now a full-out regional concern. You’re talking UAE, you’re talking Israel, you’re talking Jordan, Lebanon, Turkey.
Bryan Strawser: The United States has been drug into this. I mean, right?
Bray Wheeler: Yeah.
Bryan Strawser: I mean, we’re not in direct competition here in this particular conflict. Right?
Bray Wheeler: Right.
Bryan Strawser: But we’ve taken some sides on this before. We’ve long been opposed to the Iranian influence in the Middle East, and we’ve sided with the Saudis and we’ve been allies with the Saudis for 50 years.
Bray Wheeler: Yep.
Bryan Strawser: I mean, we have a massive defense installation and capability in Saudi Arabia.
Bray Wheeler: Yeah.
Bryan Strawser: I mean, it couldn’t be clearer. Then, the president this morning, of course, made a comment about being locked and loaded, which has now been walked back by the White House staff that he wasn’t speaking militarily but he was speaking militarily.
Bray Wheeler: Right. Locked and loaded isn’t quite a term you mince words with it. It’s not a, “Hey, we’re going out to the garden party” type of term.
Bryan Strawser: Right. Exactly.
Bray Wheeler: It’s pretty aggressive rhetoric. Yeah. I think regionally, there is a substantial concern. For the U.S., there’s a concern. I mean, politically or not, it’s forced us to access our strategic oil reserve, which put us there so that degree of kind of uncertainty or nervousness has at least caused us to engage kind of that option for us. So, yeah. This will be interesting to watch throughout the week and into next week. So hopefully, we have kind of a better update for it next week.
Bryan Strawser: So businesses need to continue to monitor the situation and take appropriate preparation steps, if you operate in Saudi or nearby countries, and just continue to monitor that situation. What’s our other topic for today’s episode?
Bray Wheeler: Yeah. This one probably won’t take too much time because fortunately, Hurricane Humberto has kind of redirected itself out towards the Atlantic, but really just want to give a quick touch base on the Atlantic tropical weather outlook. It’s been a fairly quiet start to the season. But however, in the last couple of months here, it’s been pretty active in terms of the storms. We’ve all seen the devastation that The Bahamas has had with Hurricane Dorian and some of the impact that the U.S. has experienced because of that.
Bray Wheeler: Really what we want to make sure that companies are staying connected to is, yeah, we’re coming up on kind of the end of hurricane season in November. But right now, it’s very active. There’s a number of storms both in the Pacific and the Atlantic. But in the Atlantic in particular, there’s a couple out there. So in the five-day forecast, kind of in the short-term, it’s looking okay. Kind of South Texas, that Gulf of Texas will probably see a little bit more of an increase in kind of just tropical weather. But there is a storm that’s brewing out there that has a greater than 60% chance of developing into a hurricane. Still kind of midway between the Atlantic coast and kind of The Bahamas area.
Bray Wheeler: But then Humberto was also turning out, but there are also some other weather systems that are kind of just sitting out there. So key thing for businesses, just because Humberto has kind of turned the corner and it may be pretty quiet, keep an eye on that radar here for the next few months especially and just stay posted. Because not only have we seen the devastation some of these hurricanes have wrought so far, now to just compound that with hurricanes over the top or a direct landfall. It’s certainly in the possibility. Especially, as we’re entering the third quarter and a lot of different supply chains are kind of in heavy hit mode, just want to make sure that you’re monitoring those and staying ahead of what’s going on.
Bryan Strawser: Yeah, I mean it’s not over-
Bray Wheeler: No.
Bryan Strawser: … the hurricane season. I mean, I think we think when we get to November 1st that it’s going to stop. But I mean, we’ve had major cat 3, cat 4, cat 5 hurricanes after November 1st, many times in the last 10 to 15 years. So it’s certainly something to continue to monitor. And you’re right, both the Atlantic and Pacific are very active right now.
Bray Wheeler: Yep.
Bryan Strawser: And hurricanes are getting stronger. We’re seeing more major hurricanes than before, whether that’s due to climate change or it’s just a random issue statistically. But it’s not over, and I think companies need to continue to monitor what’s going on and be prepared for that.
Bray Wheeler: Yeah. I mean, the Atlantic basin, kind of in that Gulf area, it’s super unstable right now and it’s just kind of a breeding ground storms right now.
Bryan Strawser: That’s it for this edition of the Managing Uncertainty Podcast, BryghtCast Edition. We’ll be back later this week with new episodes. Hope to hear from you then!