Note: The following conversation originally aired on Knowledge at Wharton, Sirius XM Channel 132, on September 19, 2019 . Highlights are reprinted here with permission.
Intro: We are hearing the word “war” a lot regarding the U.S., Saudi Arabia, and Iran. Secretary of State Mike Pompeo has accused Iran of an “act of war.” The Americans and the Saudis say that Iran carried out an attack on Saudi oil facilities with low-level cruise missiles and drones.
President Trump wants to increase sanctions against Iran, although he said some form of military option is not totally out of question. Iran continues to deny responsibility. The Houthi rebel faction in Yemen, who are backed by Iran, have claimed they carried out this attack.
So where are we all headed with this conflict? Kleinman Center Senior Fellow William Hederman explores this topic on Knowledge@Wharton with host Dan Loney:
Dan Loney: How much do you think we should be concerned about a level of military action at this point?
William Hederman: There is a danger of military action. I think that Europe, the U.S., and the Saudis are trying to be prudent. I am always worried that something could get out of hand, but I think that the response so far is: let’s find a way without getting into a war.
Frankly, I think Iran is finding out that their oil weapon is not as potent as it used to be. The changes in the global oil market really showed that the disruption in the Gulf tanker traffic was pretty minimal. I think we should be able to get through it without leading to war, whether they’ll be some more escalating attacks, I hope not, but I could see that happening.
DL: When you look at these attacks, I personally was a little bit surprised that we haven't seen more instances like what we saw over the weekend of an attack of an oil field. Should I be more surprised?
WH: I think that it's more surprising that there hadn't been more nuisance type attacks. It's pretty easy to go to a piece of a pipeline in the middle of nowhere and do some damage. Going into the main oil processing facility is a pretty brave move and it's hard to imagine that a ragtag group could have pulled this off. So I think this did take some serious planning and some serious hardware, so that isn't necessarily surprising. I think the extent of the vulnerability is surprising and alarming and will be a wakeup call for everyone.
DL: But how much impact will there end up being? The Saudis have said that they believe that they're going to be back to normal production by the end of this month.
WH: Exactly. So this was a major military action and it had a minor effect. I think that should be very reassuring to people around the world that need oil.
DL: You mentioned that this is going to be a wakeup call for oil producers. Take us into that mindset and what their security frame of mind has been in years past around this.
WH: I think after the cyber-attacks on Saudi Aramco a few years ago, everyone started taking cybersecurity seriously in the refining business. I think now there'll be a similar level of concern and action around protecting against a kinetic attack.
Refineries are tough to protect—but very important to protect—because many of them are near large populations. You know they were certainly built to be as far away as feasible, but urban areas have grown. You look at the ones in Houston or a Philadelphia or New Jersey; you can't get far enough away. So coming up with some very effective controls is going to be very important.
DL: Could another attack be a possibility, even in the short term?
WH: I think so, but that would sure end the debate about a counter attack. So it would be particularly unwise.
DL: And the timing, Bill, with the fact that Saudi Aramco was getting ready for potentially an IPO as well.
WH: Yup. A lot of value has been destroyed here beyond the literal damage.