The Middle East and Oil (part 1)
October 28th, 2008 Posted in In-Depth Analysis
Every morning traders are waking up, reading the morning analysis, and finding out what’s happening in the market and each day it seems as if the price of Oil is “dropping,” “falling,” “declining,” or “depreciating.” But does this really come as a surprise to anyone?
Less than 10 years ago, in 1999, the price for a barrel of Crude Oil was $16. In fact, from WWII through the 1970s the price of Crude Oil averaged between the $20-28 price range, in 2007 Dollars. These prices only rose in response to conflicts in the Middle East.
In 1973, the Organization of Petroleum Exporting Countries (OPEC) worked to cause economic damage to the Western countries which were supporting Israel during the 1973 Arab-Israeli war by imposing a quota on oil exports. The resulting increase in the price of Crude Oil drove fuel prices to unseen levels and sparked off the first Oil Shock.
In late-1978 Iran began to undergo a revolution which altered its political system entirely. Speculation about the impact this would have on oil supply, given that Iran was a major supplier of oil, created a second Oil Shock in which prices jumped dramatically from fear in the market. Iraq’s subsequent invasion of Iran in 1980 generated fears of a coming third Oil Shock.
Each time a Middle Eastern conflict arose, increasing Oil prices followed. But this increase in price acted as a bubble which was easily deflated shortly thereafter. In the mid-1980s, the Oil bubble created by the back-to-back shocks was burst; prices then came tumbling down at break-neck speeds.
What we are seeing in the market today was brought about by a number of factors, each adding another layer into the complex web of Crude Oil prices. The first of these factors ties in with the historic movement of Crude Oil prices.
Simply put, the first factor is in fact another Middle Eastern conflict. America’s invasion of Afghanistan and Iraq added an element to the internal Middle Eastern political system which analysts have not fully explained in too much detail. In order to avoid a lengthy article, that depth will not be touched here either.
To state it shortly, the inter-regional political system of the Middle Eastern countries historically operated on a program of balancing and counter-balancing each other through various alliances. When America established itself militarily in the Middle East through its unending War on Terror, it then pushed these Middle Eastern countries to ignore one another diplomatically and focus on whether or not they would be aligned with the U.S., and that fact alone has determined their authority to negotiate in the region. Consider the “rogue” status assigned to Syria and Iran, two countries who refused to deal with the U.S., and how little respect they are afforded by their neighbors as a result.
This decreased coordination among the regional states does not necessarily affect Crude Oil prices directly, but it ensures that more conflict is on the way. Turkey invading northern Iraq to suppress the Kurds is just one example. Three major factors in the pricing of Crude Oil emerge from this fact alone.
To be continued…
Read Part 2 Here
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Tags: conflict, Crude Oil, middle east, oil, OPEC
