By Marita Noon
Many complicated factors contribute to the global price
of a barrel of oil, but two of the leading components are supply and risk-and
both have the potential to escalate in the days ahead. The current region-wide
sectarian war could easily bump oil prices up dramatically. And, the expected
nuclear deal with Iran could drop them-dramatically.
Oil price predictions today play like a game of roulette,
or a carnival barker of days gone by, round and round it goes, where she stops,
nobody knows.
A few weeks ago, addressing the need to open up access to
mid-Atlantic oil resources, I
wrote:
"With the current oil
abundance, it may seem like an odd time to be going after more. However, the
legal wheels that could allow limited access to the vast, untapped oil
resources move very slowly. Today's market conditions will fluctuate between
now and 2035 when the global demand for energy is expected to spike. Not to
mention the increasingly volatile situation in the Middle East, where new
coalitions are already being formed: Iran and Iraq, Saudi Arabia and South
Korea-just to name two. If one more beheading takes place or a bomb hits the
right (or wrong) target, the region could erupt, and the entire energy dynamic
would change. Considering the variables, American energy security is always
something worth pursuing."
Well, now the "entire energy
dynamic" has changed.
First, the obvious: war in the Middle East.
Middle East unrest has historically sent oil prices
soaring. With the recent regional conflicts involving ISIS, however, prices
have continued to drop due to OPEC's increased supplies, led by Saudi Arabia,
in response to the new American energy abundance that changed the entire energy
dynamic.
That dynamic has just changed again.
Referencing ISIS and the growing terrorism throughout the
region, Jordan's King Abdullah said in December, "this is our world war
three." At the time, pundits reacted with something akin to "well,
maybe." But that was then. Now, Saudi Arabia, backed by King Abdullah-who
has declared "Jordan is fully committed to the Arab military effort in
Yemen"-and an
Arab coalition including the United
Arab Emirates, Qatar, Bahrain, Egypt, and Kuwait, plus Morocco and Pakistan,
who've
expressed interest in joining, with
intelligence and logistics support from the U.S., is bombing Yemen's Houthi
rebels, who have received training, weapons, and advisors from rival Iran.
As a result of the offensive,
CNN Money reported: "Oil prices bounced
higher on Thursday as Saudi Arabia launched airstrikes in Yemen, raising
concerns that a regional conflict could disrupt supplies." It added,
"Saudi Arabia is the world's largest oil producer, and investors fear its
involvement in the unrest could have a negative impact on production."
In one story, the
Financial Times (FT), pointed to
Yemen's limited oil production and
stated: "The attack is not
expected to cause any major disruption to supplies." And, in different
coverage: "even as some observers
raised concerns, others were more muted due to the size of Yemen's oil output."
Obviously, no one knows where "she'll stop."
But the factor of "risk" which according to Richard Mallinson,
geopolitical analyst at the London-based consultancy Energy Aspects, the markets
had "since last year turned away from paying attention to," is back.
The FT quotes him as saying: "The reality is that geopolitical risk is as
high as it has been in a long time." Increased risk means higher prices.
It gets more complicated.
The Obama administration continues to negotiate with Iran
with the intent of crafting a nuclear deal that will, ultimately, lift the
sanctions against the oil-producing county-which would allow it to increase oil
exports. Because of the sanctions, Iran's oil exports have been cut in
half-resulting in a "severely strained economy." Iran has large
amounts of oil already in storage and, according to the FT, "will fight
for its market share."
Iran wants the sanctions lifted immediately. If that
happens, the FT
reports there will be "an
injection of hundreds of thousands of barrels a day into the oil market already
struggling with a crude overhang"-which "could depress prices
further." Increased supply means lower prices.
Energy economist Tim Snyder explains it this way:
"The Iranians will be free to put another 1 million barrels of crude oil
production on the world market. The Iranian production will represent a
doubling of the current oversupply vs. world demand and will put additional
downward pressure on the world crude oil price."
Frequently calling us "the great Satan," Iran
continues to hate the U.S. Falling oil prices could serve as a death knell to
America's oil abundance (not to mention countries, such as Venezuela, that
depend on oil revenues). However the low prices would, overall, be good for
western economies-but bad for Iran and its friend, Russia.
The way to better benefit the Iranian economy, once
sanctions are lifted, is to raise oil prices-which Iran can do through the war
in Yemen.
Perhaps Saudi Arabia jumped the gun in its attacks in
Yemen. Perhaps, Iran thought it would have the deal with the P5 +1 group (U.S.,
U.K., France, Russia, China, and Germany) signed before the unrest pushed up
the prices.
With Iran calling the shots in Yemen, it (not the
friendly-to-the-west president) could control the Bab el-Mandeb strait and the
million barrels of crude oil that pass through the strait each day, not to
mention, the goods that transit the strait coming from the Far East. CNN
Money notes: "Adding to the uncertainty is Yemen's strategic location
on a shipping route linking the Mediterranean and the Indian Ocean." Each
day, upwards of 3.8 million barrels of oil and refined petroleum products flow
through the Bab el-Mandeb strait to the Red Sea-making it one of the world's key
oil chokepoints. Blocking the strait could cause a major disruption in global
crude oil prices.
But there is more.
Iran can impede the flow of traffic through the
Strait of Hormuz, which is the world's
most important oil chokepoint with 17 million barrels of oil a day
(representing more than 30 percent of the world's seaborne-traded oil) flowing
through it.
With the ability to disrupt both straits, Iran would have
the ability, if the sanctions are lifted due to the Obama administrations'
eagerness for a deal, to potentially escalate the price of oil to $200 a
barrel-which would, not only change the geopolitics, but world economies as
well. (Remember, Iran didn't support
OPEC's November decision to keep
production high and prices low.) Iran would be controlling a large part of the
worldwide flow of oil and the high prices would boost, not only its economy,
but Russia's as well-while the limited access punishes Saudi Arabia and the
high prices could badly damage Western economies. And, neither Iran nor Russia
has to increase production to benefit-but if they do, their economic return
becomes even greater.
Will Iran sign the deal and have its sanctions removed,
allowing it to inject millions of barrels of oil into an already glutted global
market? Whether or not it signs the deal, Iran can still penalize the U.S. and
Saudi Arabia, and as a result the rest of the world-making Yemen a spot on the
map we should all care about.
Round and round she goes, where she stops nobody knows.
"Considering the variables, American energy security is always something
worth pursuing."
The author of Energy Freedom, Marita Noon serves as
the executive director for Energy Makes America Great Inc.and the
companion educational organization, the Citizens' Alliance for Responsible Energy
(CARE). Together they work to educate the public and influence policy makers
regarding energy, its role in freedom, and the American way of life. Combining
energy, news, politics, and, the environment through public events, speaking
engagements, and media, the organizations' combined efforts serve as America's
voice for energy.