Why the hike? What the Syrian crisis means for regional oil production
The typical conventional link between oil and politics has come to the fore again.
The growing talk of a Western-led military strike against Syria resulted in an initial $7 increase in the price of the barrel of oil, or 6 percent last week.
Forecasters were quick to put figures that the benchmark Brent, which shot up to six-month high of $117.34 a barrel last Wednesday, could jump to $150 or even $200 a barrel in some estimates, though the panic cooled somehow later.
Even in its best of times before the current war broke out more than two years ago, it used to pump 370,000 barrel per day (bpd), of which 115, 000 bpd were exported.
Since the outbreak of the violence that turned into a full-fledged civil war, production declined to no more than 50,000 bpd, all of it consumed locally.
However, the sharp market reaction seems to reflect two things — one the fear of a wider expansion of the conflict and the relatively tight situation of supplies.
Given the pivotal Syrian position in the Middle East politics and geography, it is very much feared that any strike will have some implications given the tense and interrelated political situation in the region.
Syria with its political and geographical connections could easily be seen engaging its two important oil producing neighbors — Iraq and Iran.
With the growing sectarian strife in the region, the possibility remains high that oil installations particularly in Iraq, which produces on average 3 million bpd, could be targeted.
Iran, on the other hand, with strong baggage could be drawn into that conflict as it could see the expected strike as a way to isolate it from its most important ally in the region and a preparation of action against it.
But more serious is what could happen if Iraqi oil installations are attacked because of what perceived as an alliance between the two regimes of Bashar Assad and Nuri Al-Maliki of Iraq.
The spread of violence along sectarian vault lines seems to be of great possibility.
However, on the other hand, the tighter situation of oil supplies is another major factor that is pushing prices upward.
Ironically enough, at the time the US production is on an all-time high level, which should have impacted demand, problems facing some producers in North Sea, Nigeria and in particular Libya have their impact on the supplies situation.
Libya is the good case to mention. It used to pump 1.6 million bpd before former ruler Muammar Qaddafi was toppled more than two years ago.
Currently, production is going down by more than one million bpd because of security problems. The Zawiya terminal has become the only facility in operation, exporting 330,000 bpd were exported.
However, the uncertainty factor on the possibility of the strike and the potential implications may contribute largely to the price increase than when the strike itself takes place. Then most of the scenario regarding the possible expansion of the war may prove unjustifiable or part of an analysis that may not find its way to reality.
But for the time being the price increase will have its burden on governments, businesses and households. To what extent that will have a lasting effect is another issue.
The rising cost of living is contributing in a way to the vicious cycle of political instability because of rising inflation, unemployment and inability of growing segments of population to make ends meet.
The political turmoil on the other hand is replacing the focus of attention away from the structural changes taking place in the oil industry — the flattening of demand in the Western hemisphere and its migration to new players like China and India who are becoming the new centers of consumption.
Add to that the current and potential growth of oil demand even in producing countries themselves for reasons to do with economic and population growth, the final verdict on the shale oil and whether these two factors will have a lasting impact on the conventional oil industry.
It is usually hard to assess the situation during the times of great change and turmoil, but that has always been the case with the oil industry throughout more than 160 years of its history and because of that it was termed strategic.
By: Alsir Sidahmed Email: email@example.com