Recent events in the Middle East and North Africa, which many are dubbing the ‘Arab Spring’, carry important implications for international oil markets. Since the protests broke out in Tunisia, the price of oil (Brent) has risen from US$ 94.90 on the 4 January to US$ 120 a barrel this week, a 2 ½ year peak.
This is despite the fact that so far there has been no real impact on supply. There were concerns over the oil transiting the Suez Canal and the SUMED pipeline linking the Red Sea to the Mediterranean but there were no disruptions and in any case net volumes were small.
However, what matters initially in such circumstances is what happens to sentiment in the paper markets - the NYMEX in New York and the ICE in London. There have been fears of contagion with many ‘paper-barrel-players’ assuming the Arab world is all the same. They expect what happens in Tunisia and Egypt today will happen in the major oil producers of the Gulf tomorrow. This view has been reinforced by recent unrest in Bahrain despite the fact that it is very different from the other Gulf Cooperation Council countries which are less likely to face disruption from the bulk of their population.
The energy threat
Nonetheless in terms of physical supply, the region is crucial to global oil markets. It has 61 percent of proven world oil reserves and exports 40 percent of internationally traded crude. Disruptions in Libya (exports 1.44 million b/d) and Yemen (exports 0.125 million b/d) could begin to impinge on global markets. Already a number of international oil companies (IOCs) have suspended production operations in Libya.
There are also signs of growing unrest in Iran. Although not an Arab country, the population is quite capable of drawing inspiration for revolt against the very unpopular regime of President Ahmadinejad from the Arab street. There are already strikes among the oil workers reminiscent of the events of 1978.
In some ways the energy supply threat for Europe has more to do with gas since Europe is heavily dependent on North Africa for gas supplies. The EU15 depend for 16 percent of gas consumption on gas exports from the Middle East and North Africa while for Spain the figure is 55 percent and Italy 43 percent.
In an effort to calm markets, the International Energy Agency has been hinting at the possibility of a stock release although history shows such action is more likely to aggravate price volatility than calm it.
The long-term
Obviously, what will happen to oil supplies and price in the near-term will depend upon the outcome of the ‘Arab Spring’ and how the ‘paper-market-players’ will perceive this. However, these events do raise serious longer-term questions about investment in new capacity in the region. If future oil demand has any hope of being met, significant investment must take place to develop Middle East and North African oil reserves. Much of this will be required to come from by the IOCs. There has to be questions over their willingness to invest faced with such political uncertainty. This could mean that an impending oil supply crunch, with crucial implications for oil price levels, could come sooner rather than later.