Crude Oil Price Surge: A Geopolitical Risk

The mystifying characteristics of the oil market are its ability to surprise consumers, governments and experts through its erratic ups and downs in oil prices. The real surprise is, however, that not only small Consumers but also large and international companies and even oil market experts get it wrong. Geopolitical risks and political upheavals in most oil producing countries have the proclivity of causing upsurge in oil prices. In 1972, the price of crude oil was about $3.00 per barrel. By the end of 1974, the price of oil had quadrupled to over $12.0. The Yom Kippur War began with an attack on Israel by Syria and Egypt on October 5, 1973, the west especially US demonstrated their backing for Israel. Consequently, several Arab exporting nations and Iran imposed an outright ban on the countries aiding Israel. While these nations reduced supply of oil by five million barrels per day, other oil producing countries were able to increase production by a million barrels. The net loss of 4 million barrels per day extended through 1974 culminating to a rise in crude oil prices. In 1979 and 1980, events in Iran and Iraq led to another round of crude oil price increases. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels per day of oil production between November 1978 and June 1979. The Iranian revolution was the proximate cause of what would become the highest price in post-WWII history. However, its impact on prices would have been limited and of relatively short duration had it not been for subsequent events. Shortly after the revolution, production was up to 4 million barrels per day. The combination of the Iranian revolution and the Iraq-Iran War caused crude oil prices to more than double increasing from $14 in 1978 to $35 per barrel in 1979. The spread of North African political upheaval from Tunisia and Egypt to Libya and the subsequent shutdown of some oil companies in those countries could be responsible for the 28th December 2011 announcement by NPA to increase the prices of the petroleum products to about 20%, in fact it is important to stress that NPA have been very magnanimous on this current increase judging from the recent ‘ratchet’ in prices of crude oil in global market. West Texas Intermediate (WTI) breached US$100/barrel for the first time since September 2008, while its European counterpart, Brent, surpassed $111. A member of OPEC, Libya has been producing close to 1.6 million barrels of oil per day, 1.8% of global output of 88.5 million barrels of oil per day, unlike in 2008, when the spike in oil prices reflected booming demand and a speculative agitation, the risk of $150 and over oil now stems from a potential major supply shock. In such cases, supply cannot respond as quickly as demand to market signals, keeping oil prices elevated for longer and deepening the decline in oil consumption and overall economic activity required to balance markets. The lessons are that, efforts must be made to ensure a peaceful election come 7th December 2012, if not that, we will be producing oil, yet petroleum products will keep on sky rocketing . This is equally the time for the government economic management team to institute robust appropriate policy responses to curtail this recurrent challenge. To be continued....

Stephen kansuk
Kansuk_stephen@yahoo.com