'Horror scenario' of petrol at $3 a litre possible after Saudi strike - economist

Don't be surprised if you run into queues at the petrol pumps this week, with warnings there could be massive price hikes on the way.

Drone strikes on Saudi Arabian production facilities at the weekend have dented the major oil-producing nation's output, and with confusion over who carried out the attack, there are fears the region is on the brink of war.

"Saudi Arabia in regards to the oil industry around the globe is about as strategically important as Beaden Barrett is to the All Blacks or Steve Smith is to the Australian cricket team," Kiwi economist Cameron Bagrie told The AM Show on Monday. 

"It really matters. Saudi Arabia's 10 percent of global production... we're going to see oil prices move up sharply over the next couple of days."

University of Otago international relations expert Robert Patman says New Zealand sources about a quarter of the $4.6 billion of oil it imports every year from the Middle East region.

"We're likely to be affected in the not-too-distant future," he told Newshub. "There will be renewed impetus to reduce their dependence."

BP told Newshub they review prices every day to remain "as competitive as possible", but admitted it's "possible there could be an impact on local prices later this week".

"Our prices are reflective of the barrel prices on international markets, amongst other influencing factors," said spokesperson Gordon Gillan.

Bagrie said there are two key factors that will decide what happens to prices at the pump.

"One, how quickly can they get production back online - at this stage we can't answer that. And the second big uncertainty is, are we likely to see more strikes around the globe at some stage? ... It looks like America might fire back towards Iran. If we start to see reciprocal strikes, watch out - prices could be moving up."

The attack was carried out by drones. Houthi rebels in Yemen, who have been fighting Saudi-backed government forces, claimed responsibility for the attack. 

But the US is pointing the finger at Iran, saying there's no evidence the drones came from Yemen. Other reports have the drones entering from Iraq, which Baghdad has denied. Kuwaiti authorities say they saw drones crossing their territory from Iraq. Saudi Arabia is yet to accuse anyone yet.  

Robert Patman.
Robert Patman. Photo credit: The AM Show

Dr Patman says the uncertainty could spell trouble, particularly now it's clear non-state actors "from Houthis to Hezbollah" have access to destructive drone technology. 

"I think the reason many people are nervous is that if the Trump administation believes that Iran is responsible, they may be party to retaliation against Iran. It's certainly potentially an explosive situation." 

Provided that doesn't happen, Saudi Arabia has said its exports would continue as normal as it has massive reserves to draw upon. 

Cameron Bagrie.
Cameron Bagrie. Photo credit: The AM Show

Despite some experts predicting oil prices will double from US$60 to upwards of US$100, Bagrie says at this stage that's "Chicken Little sort of suff".

"America's got US$1.3 billion worth of reserves. If you look at OPEC, OPEC's got 2.9 billion barrels' worth of reserve, so we've got a little bit of a buffer."

The "horror scenario" at this stage, he says, is $3 a litre.

"If you look at the imported component of the petrol prices, it's about 75c. Let's keep the maths simple - let's say that oil prices basically double, that imported component will go from 75c to $1.50."

The Yemen civil war has raged since 2015. Reuters reports while the Saudi coalition has air superiority, its come under pressure not to use it due to growing civilian casualties; while the Houthis are better at guerilla warfare and fighting on the ground.

Tens of thousands have died since fighting broke out in 2015, after a failed attempt at transferring power from the authoritarian President Ali Abdullah Saleh.