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Page added on June 19, 2014
Will the Iraqi Siege Cause Oil and Gasoline Prices to Spike?
Should we be worried about a major spike in oil prices—and summer gas prices—because of the sectarian conflict in Iraq? It’s an important question in the markets right now, because every $10 increase in the price of oil shaves 0.5 percent of global growth. I’m cautiously optimistic for the moment that the answer will be: no.
Oil, as I’ve written before, is amongst the most fear driven commodities. Supply and demand are supposed to rule markets, but every time there’s a major conflict in the oil rich Middle East—from the Iranian revolution to the Gulf War—prices go up about 30 percent higher than they should be, regardless of the facts on the ground. Even when supply isn’t interrupted, even when there’s plenty of oil to fuel world markets, the price of crude is typically driven by fear rather than reality.
So what are the facts on the ground right now in Iraq? The refinery that is currently under siege by militants is in the north and used mostly for domestic consumption. That’s not great news for Iraqis, but it has little bearing on international markets. The major oil fields that produce for the export market are in the south of the country, firmly in the hands of the government, and exports are actually increasing. The fact that big Western oil majors like BP and Exxon are pulling out staff isn’t great news, because developing countries like Iraq typically need outsider help to keep production efficient. I think it’s fair to say that if the conflict continues for months, Iraq may struggle to keep production levels high, but I don’t think we’re going to see a major supply disruption unless conflict moves South.
That said, I think there will be small to moderate price hikes in crude, because oil markets pivot so much around uncertainty. Gas prices were already higher than they should be for this time of year because of increased demand in the US, which is growing faster these days, and also maintenance being done on refineries in the South of the US. In terms of any potential supply disruption because of the Iraqi siege, it’s possible that Kurdish oil exports may be affected, but again, that has little bearing on the international market, since they were already down because of other issues — Turkey, ownership, a continuing fight with the central government, etc.
Long story short—any conflict in oil-producing country is bad news for prices. But I don’t think you’ll see the sort of 30 percent spikes you did in past conflicts unless things get a whole lot worse.
17 Comments on "Will the Iraqi Siege Cause Oil and Gasoline Prices to Spike?"
foxv on Thu, 19th Jun 2014 2:44 pm
“unless things get a whole lot worse.”
I love these seclusive analysis. “If nothing ever happens or changes then things will stay exactly as they are now”
No $hit Sherlock. That’s up there with moody rating MBS as AAA as long as nobody defaults.
Anyways, This little spectacle has only just started. The odds of Iraq getting A LOT worse are much greater than they are of getting better at this point. Especially with no international help coming the rescue; at least until things do get much worse.
Here’s a question for you Rana:
what happens to those Southern fields when those “Secure hands” are attached to a fallen government?
What happens if Iran comes in and escalates this to a full on Sunni/Shia holly war?
What will Saudi Arabia think of that?
Long story short – a 30 percent price spike is the least you’ll see if this gets out of hand.
Perk Earl on Thu, 19th Jun 2014 3:09 pm
http://www.oil-price.net/
Brent is over 114 and WTI is 105 something. Before this started brent was 110 and WTI was 102, so not much change.
I wonder what the threshold oil price is at which point the economy tanks. 125? 130? 135? It was 147 in 08 but that was also in conjunction with the sub-prime mtg. meltdown. It also gets into a question of what price and for how long? It’s like turning valves raising pressure – at what point does it vent off, descending into recession?
Hey, where the heck is everybody on these boards?
Northwest Resident on Thu, 19th Jun 2014 3:09 pm
When I read in the 2010 Joint Operating Environment (top U.S. Military security analysts musing about future security threats to America) that the world “could begin experiencing energy shortfalls as early as 2015”, I did not think that they were merely flipping a coin and coming up with the year 2015. Just the opposite. I read that as a direct warning that 2015 *IS* the year that we will begin to experience energy shortfalls, with all the dire international security issues associated. I figured the U.S. Military knew that 2015 is the year the shit hits the fan, but they couldn’t come right out and say it, so they phrased it in a way that would provide ample and fair warning to anybody attentive enough to listen and smart enough to “get the message”. We see articles constantly where they’re talking 2020, 2030 — ten years from now, twenty, blah blah blah. And maybe that will be the case. But if anybody who is aware of the coming collapse is thinking they’ve got “a few more years to prepare”, I advise those folks to tighten up their schedule and get ready for 2015. What we see happening in Ukraine is nothing compared to what is happening in Iraq. This is serious shit going down in Iraq, the dogs of war have been let loose. And what better excuse for TPTB to use than “hey, we just couldn’t control those terrorists in Iraq — we tried and tried, really we did, etc…”. Take Iraq oil out of daily production, or just cut it by a third or more, and there you have your significant worldwide oil shortages that WILL bring serious consequences, and I’m not talking about paying more for gas — that will probably be the most immediate result, but the consequences that follow will be much, much worse.
davew on Thu, 19th Jun 2014 3:33 pm
There is never a “shortage” in a free market. Prices rise or fall to equalize supply and demand.
Clearly there is a shortage of $40/bbl oil, but that is not the market price. If prices were $40/bbl, demand would be much higher. But suppliers are not able to provide enough oil to satiate that demand, so prices rise. That’s because supplies are constrained. That’s where we are now.
At $100/bbl, there is less demand (than there would be if prices were $40/bbl). If prices were $120/bbl, demand would shrink to just those willing to pay $120/bbl. Right now, it’s true that “there’s plenty of oil to fuel world markets.” Twenty years from now, there will also be “plenty of oil to fuel world markets,” but it will be at a different price and probably much lower quantity. But the market will clear and everyone willing and able to pay will have oil. That’s how markets work.
And then the price will adjust again.
I’d like to know why the writer of this article believes the oil currently being exported won’t be kept domestically to satisfy demand from Iraqis formerly served by the refinery now in ISIS’s hands? Is there a history in Iraq of the domestic market being ignored in order to export to foreigners? That sounds strange to me. Isn’t petroleum consumption in Iraq subsidized, or was that discontinued during the war? Maybe this writer knows something that makes him/her believe this.
Northwest Resident on Thu, 19th Jun 2014 3:51 pm
davew — I get what you’re saying, mostly. But let’s agree that when economists talk about supply and demand, they are doing so in a vacuum where reality is frequently disconnected from the high-flying lingo they like to throw around.
In the economist’s world, demand for oil may go up or down depending on the affordability of oil. But in the real world, the “demand” for oil is dependent on a lot more than just how much that oil costs.
Same with food, in general. Because people must eat, there is very strong demand for food, regardless of how able those people are to afford the food. Just because a person is unable to purchase food due to high cost or no money does not mean that his “demand” for food has lessened — unless, of course, you’re an economist!
Or is there something about the “supply and demand” as defined by economists that I’m missing?
Point is, there is already a “shortage” of oil in the free market. There isn’t enough oil to grease the wheels of economic growth. Economic growth demands more and more and more oil — but that oil is not there. In reality, demand has not decreased, but in the economist’s definition of “demand”, it has.
Big difference…
Dave Thompson on Thu, 19th Jun 2014 4:43 pm
Thank You Northwest, this is the point being glossed over. The economy runs and grows only by the supply of energy inputs. All else is used for the economists to justify their costly college degrees.
eugene on Thu, 19th Jun 2014 4:55 pm
I didn’t know economists lived in the real world. Everything I read an economist saying appears to be from some other reality than I’m living in. Rigid thinking is a vast understatement. However, rigid thinking is a comfortable place free of complexity, confusion, insecurity and doubt.
davew on Thu, 19th Jun 2014 4:58 pm
Hi NR: Yes, the economic term “demand” is different from the vernacular use of the term “demand.” We all “demand” things we can’t have, either because we don’t have the money or the things don’t exist. I demand flying cars and ice cream delivered to my door.
The writer of this article is talking fast and loose about “demand” in a market. He or she should be careful he or she understands what demand actually is. Is it, or should it be, the goal of the market to provide enough supply so there is no more demand left to satisfy? The price would have to be zero, because otherwise there would still be someone, somewhere, who would pay a penny for a barrel. Is that realistic? If oil were free, how much “demand” would there be for it? Is the market inadequate because it’s not providing that amount? At what price is the market providing the appropriate supply? These questions are often ignored and it leads to some silly statements about how “well supplied” that market is. You can’t talk about a quantity without also talking about a price.
A lot of people, including whoever wrote this piece, don’t seem to understand markets. I was just having some fun pointing that out. 🙂
penury on Thu, 19th Jun 2014 5:01 pm
There is a mid-term election coming this year. The President has a vested interest in maintaining low gasoline prices and as he has shown in the past has an oil reserve and is not afraid to use it. Look for price increases after the summer driving season. (I am a little bit jaded about politicians)
Perk Earl on Thu, 19th Jun 2014 5:07 pm
“Twenty years from now, there will also be “plenty of oil to fuel world markets,” but it will be at a different price and probably much lower quantity.”
Twenty years from now plenty of oil to fuel world markets? Not sure I can agree with that davew. You could make that same comment and change the time to 40 years, 60 years, but if supply descends to the point where it is no longer sufficient to move all the merchandise (incl. food) to keep the economy moving for 7 billion plus people then not only will it slip into recession, but at some tipping point it will descend into chaos. That could be any number of years from now.
Northwest Resident on Thu, 19th Jun 2014 5:08 pm
davew — Gotcha! Just doing a reality check… 🙂
Kenz300 on Thu, 19th Jun 2014 6:35 pm
The sooner we transition to alternatives the better……..
Walking, bicycling, electric vehicles and biofuels can all reduce the demand for oil………….
Energy Investor on Thu, 19th Jun 2014 7:05 pm
perk earl,
Just remember that the longer you project out, we will be dealing with substantially more people wanting feeding and substantially less daily production from existing oil fields.
Not a happy recipe.
But spare a thought for those ISIS folks in their humvees and trucks, rushing around in the desert. They either take the refinery or perish like Hitler’s Panzer divisions did in WWII. They don’t run on air. Their supply lines are ridiculously long, regardless of how much fuel they originally captured.
Perk Earl on Thu, 19th Jun 2014 8:54 pm
“Just remember that the longer you project out,”
It came across maybe like I was projecting longer, but actually my point was there will only enough oil to support BAU for so long (which I’m figuring is a lot less than 20 years) then it won’t work anymore. Things already seem like they are getting stranger by the day, like acts of violence.
Makati1 on Thu, 19th Jun 2014 10:36 pm
The author seems to forget the problems in other oil exporting countries like Libya, Oman, Nigeria, Venezuela, etc. They too will affect oil price and economies over the next few years. The West has beaten on too many hornet’s nests and now will receive the punishment it deserves.
Arthur75 on Fri, 20th Jun 2014 8:50 am
Obama had a bit of straightforwardness yesterday :
“It is in our national security interests not to see an all-out civil war inside of Iraq, not just for humanitarian reasons, but because that ultimately can be destabilizing throughout the region. And in addition to having strong allies there that we are committed to protecting, obviously issues like energy and global energy markets continues to be important. ”
(transcript whitehouse gov)
One will remark the kind of euphemism consisting now in using “energy” to refer to petroleum or “oil&gas”.
And regarding oil and the petro dollar, if there is a “myth” or false common image that it would be extremely urgent to get out of these days, it is :
“first oil shock (73) = Yom Kippur/Arab embargo= geopolitical story= nothing to do with geologic constraints”
When the real story was :
– end 1970 : US production peak, the energy crisis starts from there, with some heating fuel shortages for instance (some articles can be found on NYT archive on that), or :
http://upload.wikimedia.org/wikipedia/commons/c/c5/US_Oil_Production_and_Imports_1920_to_2005.png
– Nixon name James Akins to go check what is going on.
– Akins goes around all US producers, saying this won’t be communicated to the media, but needs to be known, national security question
– The results are bad : no additional capacity at all, production will only go down, the results are also presented to the OECD
– The reserves of Alaska, North Sea, Gulf of Mexico, are known at that time, but to be developed the barrel price needs to be higher
– In parallel this is also the period of “rebalance” between oil majors and countries on each barrel revenues (Ghadaffi being the first to push 55/50 for instance), and creation of national oil companies.
– there is also the dropping of B Woods in 71 and associated $ devaluation, also putting a “bullish” pressure on oil price.
– So to be able to start Alaska, GOM, North Sea, and have some “outside OPEC” market share, the barrel price needs to go up (always good for oil majors anyway) and this is also US diplomacy strategy
– For instance Akins, then US ambassador in Saudi Arabia, is the one talking about $4 or $5 a barrel in an OAPEC meeting in Algiers in 1972
– Yom Kippur starts during an OPEC meeting in Vienna, which was about barrel revenus percentages, and barrel price rise.
– The declaration of the embargo pushes the barrel up on the spots markets (that just have been set up)
– But the embargo remains quite limited (not from Iran, not from Iraq, only towards a few countries)
– It remains fictive from Saudi Arabia towards the US : tankers kept on going from KSA, through Bahrain to make it more discrete, towards the US Army in Vietnam in particular.
– Akins is very clear about that in below documentary interviews (which unfortunately only exists in French and German to my knowledge, and interviews are voiced over) :
http://www.youtube.com/watch?feature=player_embedded&v=fQJ-0jAr3LQ
For instance after 24:10, where he says that two senators were starting having rather “strong voices” about “doing something”, he asked the permission to tell them what was going on, got it, told them, they shat up and there was never any leak. The first oil shock “episode” starts at 18:00
The “embargo story” was in fact very “practical”, both for the US to “cover up” US peak towards US public opinion or western one in general, but also for major Arab producers to show “the Arab street” that they were doing something for the Palestinians.
In the end, clearly a wake up call that has been missed.
Note : About Akins, see for instance :
http://www.washingtonpost.com/wp-dyn/content/article/2010/07/26/AR2010072605298.html
And his famous foreign affair article :
http://www-personal.umich.edu/~twod/oil-ns/articles/for_aff_aikins_oil_crisis_apr1973.pdf
His report to Nixon in 71 or 72 is still classified to my knowledge though, would be interesting to know if it can be declassified now.
rockman on Fri, 20th Jun 2014 8:56 am
Arthur – Yes…a straightforward description of what we would and wouldn’t want to see happen in the region. Hopefully we’ll soon see similar straightforward statements detailing how the US will achieve those goals.