Will Saudi-led military action against Houthi rebels in Yemen have a major impact on oil prices and GCC economies as a whole?

The conflict in Yemen has snowballed into a major humanitarian crisis according to the United Nations, with an estimated 1,820 people killed and 7,330 injured since March 19. Actual figures are anticipated to be much higher.

More than 545,000 people have also been displaced in Yemen since March 26, when Saudi Arabia along with a coalition of regional partners launched Operation Decisive Storm in order to help the Yemeni government combat the Houthis. 

The Arab state first erupted into chaos after Iran-allied Houthi rebels captured the capital Sana'a in September, forcing President Abd-Rabbu Mansour Hadi to flee to Saudi Arabia. The ensuing violence, which broke out between the Houthis and forces loyal to the government, alarmed neighbouring Saudi Arabia.

The Kingdom, along with its allies from the GCC - UAE, Bahrain, Kuwait and Qatar and the wider MEA region - Jordan, Egypt, Morocco and Sudan began the operation by conducting air strikes.

Since then the bloodshed has continued. Although a five-day ceasefire for humanitarian relief was held in May, hopes to prolong it were dashed with both sides resuming attacks soon after the truce ended. 

The UN agreed to sponsor peaceful political dialogue between the Yemeni parties in Geneva on May 28, but the talks  have now been postponed.

Saudi's King Salman bin Abdulaziz, however, vowed that action against the rebels would continue until the country was "stable and safe" and the government under Hadi was restored to power.

"The excruciating reality of terrorism, internal conflicts and bloodshed experienced by a number of Arab countries are only the inevitable result of an alliance between terrorism and sectarianism, which is led by regional powers whose blatant interventions in the Arab region have resulted in undermining security and stability in some of our countries," he said during the Arab League Summit in Sharm El-Sheikh, Egypt.

Economic Impact?

While Saudi and its allies are confident about continuing military action until their aim is achieved, will regional GCC economies feel the pinch?

Soon after Operation Decisive

Storm was announced, there was an immediate reaction in the oil market. Prices surged by up to 6 per cent over concerns that conflict in the region could disrupt supplies.

"Oil prices rose initially as the risk of supply disruption heightened. However, following the Iran nuclear deal and talks of lifting of sanctions - market players foresaw it as an event which could push the supply of oil in global markets and subsequently it fell," explained M.R. Raghu, senior vice president-Research at Kuwait Financial Centre (Markaz).

The continuation of the conflict has once again triggered worries over whether supply could be affected in the future. In combination with other factors such as reducing US supply and ISIL fears, the conflict has pushed up crude prices. They are hovering at around $65 per barrel (at the time of publication).

But Raghu predicts that the actual impact of the Yemeni conflict on oil supply is limited. Operation Decisive Storm is positioned in the southern border region of Saudi Arabia and Yemen and with the Kingdom's oil assets predominantly lying in the eastern region, production disruption in Saudi is anticipated to be minimal.

Also, with Yemen not being a major supplier on the global stage, it is unlikely to affect the production level of oil. Although it shut down its major refinery, the country's production was only around 130,000 bpd of crude in recent months.

"However, the closing of maritime transit of oil through the narrow strait of Bab el-Mandab (approximately 3.4 million bpd of oil gets transported through this strait) would prohibit the tankers in the Arabian Gulf region from reaching Suez Canal and they may have to travel in an elongated route all around the African continent to supply to the European markets," added Raghu.

According to him, despite the direct involvement of Saudi Arabia, the implications of the Yemen conflict may have no measurable impact on GCC economies. Exposure of the Gulf economies to Yemen in the form of
trade or investments remains miniscule at present.

As such, GCC economies have remained resilient to the threats posed by geopolitical risks in the neighbouring states. They saw marginal impact from the Arab uprisings and the Iraqi turmoil in the recent past.

"However, if the Yemen conflict extends beyond the borders and prevails for an elongated time period - drawing in the major powers, a low probability event in reality, the accompanying impact could be high as it could undermine the investor confidence and destabilise markets in the region," he cautioned.

© Gulf Business 2015