Supply Chain

Will Saudi Oil Strikes Hamper Supply Chains?

The impact will likely be mostly in the short term, but only if there isn't another production-depleting incident.
David McCannSeptember 19, 2019
Will Saudi Oil Strikes Hamper Supply Chains?

First it was digital disruption. Then it was events like Brexit and trade battles. Now, a new, violent issue has emerged to threaten supply chains around the world.

The drone strikes at oil facilities in Saudi Arabia last weekend, which took out 5% of the world’s daily oil production and sent crude oil prices soaring, is certain to have short-term — and potentially long-term — supply chain ramifications across industries.

The immediate impact will be significant because of the disruption to oil output. But the impact on the global economy could be more pronounced if the lack of production lasts for an extended period.

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As things currently stand, other oil producers can make up for the decline in Saudi Arabia’s output. The United States, for instance, has authorized the release of oil from its Strategic Petroleum Reserve. Russia and other oil-producing nations could also ramp up supply to fill in the gaps.

For now, the impact of the attack will be felt most by companies with small inventories of raw materials, as their leaders will have to immediately find alternatives before supply runs out. Any organization’s supply chain is linked to its ability to keep inventory, and that varies massively from organization to organization and industry to industry.

Airlines, cruise lines, and other companies for which oil is a primary raw material usually buy long-term contracts at fixed prices and often keep on hand a supply of two months or more. Those organizations are in a better position than a smaller manufacturer that may only keep a week’s supply of oil in reserve and thus would be more exposed to near-term price fluctuations.

It’s worth nothing, though, that major airline, cruise ship, and retail stocks fell Monday, and analysts are already suggesting the attack could impact next year’s profit projections.

Experts say the attack is another illustration of how important supply chain agility is for companies today.

U.S. companies, for instance, have been rushing to adapt their supply chains to minimize the impact of the trade battle with China. Pharmaceutical companies, food distributors, and other companies in the U.K. are scrambling to find supply chain alternatives to keep products flowing without interruption leading up to the possible Brexit.

What has increasingly become apparent is that supply chains need to lead with risk management because of their vulnerability.

To be sure, the impact on oil production from the attack most likely will be short-lived. The system usually is able to get back on track following such events rather quickly.

But that’s if nothing else happens — a big if, considering the number of unpredictable events that disrupted supply chains lately. Another incident in any other market could severely strain capacity and pose higher risk for the entire sector.

Bernhard Raschke is head of EMEA supply chain centre of excellence at organizational consulting firm Korn Ferry. Jonathan Holmes is the firm’s managing director, Middle East & North Africa.