Oil exports from the Middle East Gulf States amounted to 19.6 million barrels per day in 2013 [BP] equivalent to 22.6% of total global oil production and 43% of OECD oil consumption. The importance of the region to the well being of the global economy cannot be overstated. It is therefore pertinent to ask what risk ISIS presents to the stability of the region and its oil supplies. History has some clues.
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Oil Price
Re: Oil Price
Three scenarios that may lead to a disruption of oil supplies from The Gulf region.
1) The disintegration of Iraq: Iraq has already disintegrated into Kurdish, Sunni Arab and Shia Arab territories. But there has not yet been a serious fight over control of Iraq’s oil wealth. The Kurds seem to be in control over the northern fields and Turkish export route and the Shia remain in control of the southern fields around Basra and the supergiant East Baghdad field. If there is a fight for control over these fields then western companies may flee and infrastructure may be damaged taking up to 2.4 million bpd of exports off line. This may in part be compensated by growing production and exports from Kurdistan. Disruption at this level may be absorbed by OPEC and is unlikely to severely impact oil prices in the medium term.
2) The involvement of Israel: It is difficult to know the precise objectives of ISIS, but attacking Israel figures in the rhetoric. It does not seem likely that ISIS presents a credible military threat to Israel and so it is only in the event of horrific terrorist attacks and Israeli reprisals that a regional disruption to oil supplies may emerge, with, for example, closure of the Suez Canal. The likelihood and consequences of such events are near impossible to call.
3) The Arab Spring dawns in Saudi Arabia: The spread of religious and tribal dissent within Saudi Arabia itself is what I see as the most significant risk to oil supplies from the region. If the West’s ally and swing producer, who is called upon to make up for production shortfalls else where, descends into chaos then this would be extremely serious. In effect ISIS may emerge in Saudi Arabia without having to go there. In 2006 there was a terrorist attack on the Abqaiq oil processing plant that accounts for about 50% of Saudi production. This event, which had enormous significance, went largely unreported in the West. By all accounts there was a gun battle, security perimeters were breached and the attackers came close to fulfilling their goal. With a population of 28 million, Saudi Arabia is kept stable by the carrot of generous state handouts and the stick of state security agencies. It remains to be seen if events that have unfolded in Egypt, Libya, Syria and Iraq can avoid unfolding in Saudi Arabia. The global economy could not survive the loss of Iraqi and significant amounts of Saudi oil. I think it is safe to assume that should Saudi begin to unravel that the West would intervene.
1) The disintegration of Iraq: Iraq has already disintegrated into Kurdish, Sunni Arab and Shia Arab territories. But there has not yet been a serious fight over control of Iraq’s oil wealth. The Kurds seem to be in control over the northern fields and Turkish export route and the Shia remain in control of the southern fields around Basra and the supergiant East Baghdad field. If there is a fight for control over these fields then western companies may flee and infrastructure may be damaged taking up to 2.4 million bpd of exports off line. This may in part be compensated by growing production and exports from Kurdistan. Disruption at this level may be absorbed by OPEC and is unlikely to severely impact oil prices in the medium term.
2) The involvement of Israel: It is difficult to know the precise objectives of ISIS, but attacking Israel figures in the rhetoric. It does not seem likely that ISIS presents a credible military threat to Israel and so it is only in the event of horrific terrorist attacks and Israeli reprisals that a regional disruption to oil supplies may emerge, with, for example, closure of the Suez Canal. The likelihood and consequences of such events are near impossible to call.
3) The Arab Spring dawns in Saudi Arabia: The spread of religious and tribal dissent within Saudi Arabia itself is what I see as the most significant risk to oil supplies from the region. If the West’s ally and swing producer, who is called upon to make up for production shortfalls else where, descends into chaos then this would be extremely serious. In effect ISIS may emerge in Saudi Arabia without having to go there. In 2006 there was a terrorist attack on the Abqaiq oil processing plant that accounts for about 50% of Saudi production. This event, which had enormous significance, went largely unreported in the West. By all accounts there was a gun battle, security perimeters were breached and the attackers came close to fulfilling their goal. With a population of 28 million, Saudi Arabia is kept stable by the carrot of generous state handouts and the stick of state security agencies. It remains to be seen if events that have unfolded in Egypt, Libya, Syria and Iraq can avoid unfolding in Saudi Arabia. The global economy could not survive the loss of Iraqi and significant amounts of Saudi oil. I think it is safe to assume that should Saudi begin to unravel that the West would intervene.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Oil Price
On July 8 : The U.S. Energy Information Administration raised its 2014 and 2015 average price estimates for crude oil, gasoline and natural gas, according to a monthly report released Tuesday.
“The escalating conflict in Iraq, continued record-high levels of Chinese crude oil imports in 2014, and ongoing delays to Libyan oil exports have contributed to upward price pressure,” the government agency said.
For 2014, the EIA forecast average prices of $100.98 a barrel for West Texas Intermediate crude oil, up from an estimate of $98.67 in the previous monthly report. It estimates an average 2015 price of $95.17, up from $90.92.
Brent crude prices are likely to average $109.55 a barrel this year and $104.92 next year, the EIA said. Previous estimates were for $107.82 and $101.92, respectively.
U.S. regular retail gasoline prices will average $3.54 a gallon this year and $3.45 a gallon in 2015, up from $3.50 and $3.38, respectively.
For natural gas, spot prices are likely to average $4.77 per million British thermal units in 2014, up from a previous estimate of $4.74. Next year, the EIA is looking for an average of $4.50, up from a previous prediction of $4.49.
“The escalating conflict in Iraq, continued record-high levels of Chinese crude oil imports in 2014, and ongoing delays to Libyan oil exports have contributed to upward price pressure,” the government agency said.
For 2014, the EIA forecast average prices of $100.98 a barrel for West Texas Intermediate crude oil, up from an estimate of $98.67 in the previous monthly report. It estimates an average 2015 price of $95.17, up from $90.92.
Brent crude prices are likely to average $109.55 a barrel this year and $104.92 next year, the EIA said. Previous estimates were for $107.82 and $101.92, respectively.
U.S. regular retail gasoline prices will average $3.54 a gallon this year and $3.45 a gallon in 2015, up from $3.50 and $3.38, respectively.
For natural gas, spot prices are likely to average $4.77 per million British thermal units in 2014, up from a previous estimate of $4.74. Next year, the EIA is looking for an average of $4.50, up from a previous prediction of $4.49.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group