Saudi Supply Chain Shock

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. 

Over the weekend, drone strikes at oil facilities in Saudi Arabia took out 5% of the world’s daily oil production, or just under six million barrels a day, and sent crude oil prices soaring during trading Monday. The event is certain to have short-term—and potentially long-term—supply chain ramifications for organizations across industries. 

“The immediate impact will be significant because of the disruption to oil output,” says Jonathan Holmes, managing director of the Middle East and North Africa for Korn Ferry. Holmes says that the impact on the global economy could be more pronounced if the lack of production last for an extended period. That could keep oil prices high with the additional costs being felt most by consumers and retailers in the form of higher gas and energy prices.

As it currently stands, however, other oil producers can make up for the decline in Saudi Arabia’s output caused by the attack. 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, Holmes says, the impact of the attack will be felt most by organizations with small inventories of raw materials, as leaders of those companies 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,” says Holmes. 

Airlines, cruise ships, and other organizations where oil is a primary raw material, for example, usually buy long-term contracts at fixed prices and often keep a supply on hand 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, with analysts 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 organizations 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 chain needs to lead with risk management because of the vulnerability of supply chains,” says Bernhard Raschke, who runs the Supply Chain practice for Korn Ferry in London.

To be sure, Holmes says the impact on oil production from the attack should be short-lived, with the system usually able to get back on track following such events rather quickly. But, he cautions that is if nothing else happens—a big if, considering the number of unpredictable events that disrupted supply chains lately. “Any other incident in any other market could severely strain capacity and pose higher risk for the entire sector,” says Holmes.