Can A Shadow OPEC Set Global Oil Prices?

The run-up in oil prices over the last four years is usually framed, likely correctly, as a combination of torrential demand from developing countries (China and India), speculation, and peak supply. Other analysis indicates that production is also being damaged due to NOC mismanagement, political instability, and rapid increases in domestic consumption within oil exporting countries.

However, the rapidity and volatility of current oil prices may be due to a more narrow set of factors surrounding the production of light sweet crude.

… The war in Iraq has proven to be a proving ground for the strategies and tactics of 21st Century warfare, much like the Spanish Civil War was for WW2. Unfortunately, the bulk of the improvement has been in how small groups of guerrillas/terrorists can defeat a nation-state. Of particular note has been the increasing use of sabotage and targeted violence to induce systemic failures in critical infrastructure. These use of these methods have been concentrated in many of the states that produce light sweet crude.

… So, given production limitations and strong/concentrated demand, even small disruptions by guerrilla groups on light sweet crude production is likely to have a direct influence on global oil pricing (in contrast, disruptions aimed at heavy crude production should have little impact on global pricing). Further, there are already active groups in many of the most critical production areas.

Fortunately, from the demonstrated behavior of these groups it doesn’t appear that guerrilla/terrorist groups have fully grasped their potential market power with small attacks (despite aspirational pronouncements from al Qaeda and large scale attacks in 2005/2006). Once they do, as bad as disruption is today, it could get MUCH worse.

The Oil Drum