The Middle East and Oil (part 2)
October 30th, 2008 Posted in In-Depth Analysis
The first installment left off with an intriguing question in mind: what is the resulting impact on the price of Crude Oil arising from Middle Eastern conflict? It was proclaimed that three major impacts emerge from these types of conflicts.
The first of these is the direct influence on market supply. Stated directly, conflict hampers supply by destroying, damaging, or reducing the amount of oil a country is capable of exporting through violence associated with conflict. This is the easiest aspect to understand.
As stated in the first article, Iraq was not necessarily producing vast amounts of oil as a result of the sanctions placed on its oil industry after its invasion of Kuwait in 1990-1991. When America invaded in 2003, it further crippled its oil infrastructure. However, America also brought with it the possibility of reconstructing and enabling the exporting capability previously restricted and/or destroyed.
Lately in the news it is being reported that Iraqi police are starting to take the lead in patrolling and enforcing laws throughout the country. Positive reports about progress in Iraq are generating hope that it could become a functioning state in the near future. There are those who have doubts, rest assured, but the impact on speculation is enough to move the price of oil on the confidence that Iraqi oil will enter the market in larger amounts in the coming years, thereby increasing supply.
Since Iraqi oil has been absent from the market since 1991, this increase comes as a release valve to the recent high prices. But supply is only one aspect of Crude Oil prices.
The second factor influencing prices from Middle Eastern conflict is the impact supply has on demand. This is a little trickier to explain, despite sounding straight forward. When supply gets low, demand gets higher which drives prices higher. On the other hand, there is a second hidden aspect behind this in regards to Oil prices, this is the long-term impact.
When prices skyrocket the way they did this past July, the indirect result is that industries, consumers, and countries begin looking for alternatives to oil. One of the reasons the world did not begin looking for an alternative to oil in the 1970s and 80s was because governments were then taking action to reduce the impact felt from the high oil prices on the population by subsidizing them.
Today, the discussions and research involved with electric cars, better heating insulation, more efficient gas engines, and better energy consumption policies have increased dramatically primarily because of the unsustainably high price of Crude Oil which countries cannot afford to invest in as heavily as they once had.
This result has a long term impact as these new technologies are implemented even after the price comes back to normal levels. As demand slumps from low supply, whether real or imagined, it then suffers further from advancement in alternative energy technologies, which then drives the price even lower over the long term.
The third impact on the price of Crude Oil to emerge from Middle Eastern conflicts is perhaps the most important, especially these days, and will be explained in the next installment.
Stay tuned…
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Tags: conflict, Crude Oil, Iran, Iraq, Kuwait, middle east, oil, OPEC
