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Why oil prices will stay high – even without a Syria crisis

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Hamid Khatib/Reuters/File

(Read caption) A man walks at a makeshift oil refinery site in al-Mansoura village in Raqqa's countryside in Syria. A strike on Syria wouldn't directly affect oil production, analysts say, but the concern is over the reaction across the broader region.

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Syria's relative lack of oil and the rest of the world's growing abundance of it means a US strike on the country is unlikely to immediately disrupt production of one of the world's most prized commodities.

But the oil market is on edge for reasons beyond Syria. And those threats are likely to keep oil prices elevated, with or without military action by the United States and its allies. 

The threat is that violence in Syria will spill over to other nations. Even a limited Western intervention there could ripple across the Middle East, analysts caution, aggravating sectarian violence that is already crimping production.

"It’s not that it’s the strike itself," said Mihaela Carstei, deputy director for the energy and environment program at the Atlantic Council, a global think tank based in Washington. "You have to think beyond the immediate ... It could have a longer lasting impact, because it’s about the perception of the US going in again."

 

That long-term impact could extend well beyond Syria, Ms. Carstei said in a telephone interview, destabilizing oil-rich neighbors in the Middle East and North Africa

"In a post-strike environment the most likely supply impact would be on Iraq," wrote Guy Caruso, a senior adviser in the energy and national security program at the Center for Strategic and International Studies, a Washington-based think tank. "Sunni-Shite tensions would be exacerbated, which could affect Iraqi exports most likely through pipeline damage." 

In North Africa, Libya's oil industry is already struggling to recover from the 2011 civil war that toppled Muammar Qaddafi. Strikes at ports and pipelines have cut exports to around 80,000 barrels per day (bpd). That's less than a tenth of the country's capacity.

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Oil theft has plagued Nigeria. Production there is at a four-year low, down to 1.9 million barrels per day (bpd) from about 2.1 million bpd in 2012. 

All told, supply cuts in the Middle East and North Africa have risen above 3 million bpd. That's about 3.5 percent of global demand.

Oil prices are already creeping upward, with New York Mercantile Exchange futures hitting a high of more than $110 a barrel on Aug. 28. Prices fell $1.38 to $107.16 a barrel Wednesday after President Obama spoke in Stockholm.

The recent move is a "typical paper markets effect," according to Giacomo Luciani, adjunct professor of international affairs at The Graduate Institute, Geneva. Driven by a fear of a price increase, investors buy, thereby increasing prices.

"Such fundamentally irrational price movements are common and inevitable and the industry has learned to live with them, unless for some reason they persist over time and prices are driven in a direction not supported by fundamentals for an extended period of time (several months)," Mr. Luciani wrote in an e-mail.

Even a decade ago, these threats would have been enough to send the price of oil soaring on world markets. The response is less frenzied today because of the Middle East's waning influence on global oil markets. 

New drilling techniques have opened up vast reserves of previously inaccessible oil and natural gas in the US. That "shale boom" could well spread to Europe and Asia. Increased efficiency measures have driven demand down, and renewables offer even greater hope for energy independence

In the short term, the Obama administration could mitigate the effects of a potential strike by coordinating with allies in the region and elsewhere to increase oil output and plan for the possible drawdown of emergency supplies, Mr. Caruso wrote in an e-mail.

Still, the situation is far from stable, analysts said.

"Should the conflict in Syria continue to evolve as it has in recent months, compounded by the strike, neighboring countries (e.g., Iraq and possibly even Iran) could be dragged deeper into it, raising the risk of supply disruptions," wrote John Calabrese, a professor at American University and a scholar in residence at the Middle East Institute in Washington.

 

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