Many complicated factors contribute to the global price of a barrel of oil, but two of the leading components are supply and risk—and both have the potential to escalate in the days ahead.
The current region-wide sectarian war could easily bump oil prices up dramatically. And, the expected nuclear deal with Iran could drop them—dramatically.
Oil price predictions today play like a game of roulette, round and round it goes—where she stops, nobody knows. A few weeks ago, addressing the need to open up access to mid-Atlantic oil resources, I wrote:
With the current oil abundance, it may seem like an odd time to be going after more. However, the legal wheels that could allow limited access to the vast, untapped oil resources move very slowly. Today’s market conditions will fluctuate between now and 2035 when the global demand for energy is expected to spike. Not to mention the increasingly volatile situation in the Middle East, where new coalitions are already being formed: Iran and Iraq, Saudi Arabia and South Korea—just to name two. If one more beheading takes place or a bomb hits the right (or wrong) target, the region could erupt, and the entire energy dynamic would change. Considering the variables, American energy security is always something worth pursuing.
Well, now the “entire energy dynamic” has changed
First, the obvious: war in the Middle East.
Middle East unrest has historically sent oil prices soaring. With the recent regional conflicts involving ISIS, however, prices have continued to drop due to OPEC’s increased supplies, led by Saudi Arabia, in response to the new American energy abundance that changed the entire energy dynamic.
That dynamic has just changed again.
Referencing ISIS and the growing terrorism throughout the region, Jordan’s King Abdullah said in December that “this is ou World War Three.” Now Saudi Arabia, backed by King Abdullah and an Arab coalition including the United Arab Emirates, Qatar, Bahrain, Egypt, and Kuwait, plus Morocco and Pakistan, is bombing Yemen’s Houthi rebels, who have received training, weapons, and advisors from rival Iran.
As a result of the offensive, CNN Money reported: “Oil prices bounced higher on Thursday as Saudi Arabia launched airstrikes in Yemen, raising concerns that a regional conflict could disrupt supplies.”
In one story, the Financial Times (FT), pointed to Yemen’s limited oil production and stated: “The attack is not expected to cause any major disruption to supplies.”
Obviously, no one knows where “she’ll stop.” But the factor of “risk”—which, according to Richard Mallinson, geopolitical analyst at the London-based consultancy Energy Aspects, the markets had “since last year turned away from paying attention to”—is back. The FT quotes him as saying: “The reality is that geopolitical risk is as high as it has been in a long time.” Increased risk means higher prices. It gets more complicated.
The Obama administration continues to negotiate with Iran with the intent of crafting a nuclear deal that will, ultimately, lift the sanctions against the oil-producing county—which would allow it to increase oil exports. Because of the sanctions, Iran’s oil exports have been cut in half, resulting in a “severely strained economy.”
Iran wants the sanctions lifted immediately. If that happens, the FT reports there will be “an injection of hundreds of thousands of barrels a day into the oil market already struggling with a crude overhang”—which “could depress prices further.” Increased supply means lower prices.
Energy economist Tim Snyder explains it this way: “The Iranians will be free to put another 1 million barrels of crude oil production on the world market. The Iranian production will represent a doubling of the current oversupply vs. world demand and will put additional downward pressure on the world crude oil price.”
The way to better benefit the Iranian economy, once sanctions are lifted, is to raise oil prices—which Iran can do through the war in Yemen.
Perhaps Saudi Arabia jumped the gun in its attacks in Yemen. Perhaps, Iran thought it would have the deal with the P5 +1 group (U.S., U.K., France, Russia, China, and Germany) signed before the unrest pushed up the prices.
With Iran calling the shots in Yemen, it (not the friendly-to-the-west president) could control the Bab el-Mandeb strait and the million barrels of crude oil that pass through the strait each day, not to mention, the goods that transit the strait coming from the Far East. CNN Money notes: “Adding to the uncertainty is Yemen’s strategic location on a shipping route linking the Mediterranean and the Indian Ocean.” Each day, upwards of 3.8 million barrels of oil and refined petroleum products flow through the Bab el-Mandeb strait to the Red Sea—making it one of the world’s key oil chokepoints. Closing the strait could cause a major disruption in global crude oil prices. But there is more.
Iran can close off the Strait of Hormuz, which is the world’s most important oil chokepoint with 17 million barrels of oil a day (representing more than 30 percent of the world’s seaborne-traded oil) flowing through it.
With control of both straits, Iran would have the ability, if the sanctions are lifted due to the Obama administrations’ eagerness for a deal, to potentially escalate the price of oil to $200 a barrel—which would, not only change the geopolitics, but world economies as well. (Remember, Iran didn’t support OPEC’s November decision to keep production high and prices low.) Iran would be controlling a large part of the worldwide flow of oil and the high prices would boost, not only its economy, but Russia’s as well—while the limited access punishes Saudi Arabia and the high prices could badly damage Western economies. And, neither Iran nor Russia has to increase production to benefit—but if they do, their economic return becomes even greater.
Will Iran sign the deal and have its sanctions removed, allowing it to inject millions of barrels of oil into an already glutted global market? Whether or not it signs the deal, Iran can still penalize the U.S. and Saudi Arabia, and as a result the rest of the world—making Yemen a spot on the map we should all care about.
Round and round she goes, where she stops nobody knows. “Considering the variables, American energy security is always something worth pursuing.”