Ideas & Debate

How the ongoing Middle East unrest will affect global oil security and prices

Cars queue at a gas station. A confrontation involving Israel, Iran, and the US could create the most undesired consequences in global oil supplies. Photo/CHRIS OJOW
Cars queue at a gas station. A confrontation involving Israel, Iran, and the US could create the most undesired consequences in global oil supplies. Photo/CHRIS OJOW  

Major geopolitical occurrences in the Middle East have always had an adverse impact on global oil supply and prices.

The ongoing political realignments in the Arab world are already upsetting global crude oil prices which are currently above $110 per barrel.

Whereas there has not been notable reduction in global oil supply, the price hikes have been mainly speculative based on fears of supply disruptions.

The most notable historical incident that caught the world unawares was the 1973 Yom Kippur war between the Arab nations and Israel.

The prices of oil went up four-fold from about $3 per barrel to $12 within a few months.

The Arab world effectively unleashed the oil weapon through export boycotts to the Western world for supporting Israelis in the war.

The entire world woke up to a new economic reality based on high energy costs.

Also, the Western world started exploring for alternative oil sources to reduce dependence on Arab oil

The next notable incident was in 1979-80 during the Iranian revolution when the Shah of Iran was deposed by Ayatollah Khomeini.

American hostages

This was followed by Iran stopping oil exports to the US and taking Americans hostages.

This was followed by economic sanctions by Americans which have lasted to this day.

Oil prices rose from about $14 a barrel to a high of $39, which in today’s dollars is said to be higher that the $140 experienced in 2008.

The Iranian incident created a major global recession which virtually crippled our economy here in Kenya.

The ongoing political realignments in the Arab world have already substantially impacted Tunisia, Egypt, and Libya.

Although Egyptian oil production in global terms is not large, the initial fears that the Egyptian revolution would interfere with international oil transit via the Suez Canal have now vanished as the Egyptians have so far responsibly managed their political transition.

In Libya, with a production capacity of about 1.7 million barrels per day, deliveries of oil into the export market appear to far continuing with no apparent signs of potential sabotage or boycotts.

Over the last 10 years, American and British multinationals have heavily invested in Libyan upstream oil development.

This explains why the US and Britain’s reactions to the ongoing Libyan crisis remain cautious.

Unless physically sabotaged, oil production and export infrastructure, which is mostly automated, can remain immune to political turmoil as long as export terminals and routes are kept open.

Global sanctions on oil from troubled countries will probably not be an option due to global supply implications.

What is currently worrying the energy markets is that no one can tell for sure how far the unrest will spread to the key oil producing Middle East countries, and how such crises will be managed by individual countries.

Going by recent trends, it is apparent that nearly all Arab oil producing countries together with Iran (Iranians are not Arabs) could be affected by the ongoing unrest and cry for reforms.

The Middle East and Northern African countries account for about 35 per cent of total global oil production, with Saudi Arabia alone producing about 12 per cent of world oil.

As long as Saudi Arabia remains immune to the ongoing political hurricane, the country has surplus capacity that can be mobilised to partially fill gaps created by shortfalls in other producing countries.

It is therefore critical that Saudi Arabia remains stable, probably by proactively managing any inevitable political changes before they become a crisis.

Political readjustments

By the time the ongoing political readjustments in the Middle East have settled down, new and different global diplomatic formulas touching on Arab countries will have evolved.

More politically and economically assertive Arab nations will probably emerge to create an emergent economic block based on value addition to their oil resources.

The ongoing unrest in the Middle East and Northern Africa have, for the time being, diverted the world’s attention from the real threat that has been looming in the Middle East — the stand off between Iran and Israel on the subject of alleged Iranian nuclear capacity and intentions.

A physical confrontation involving Israel, Iran, and perhaps the US, would create the most undesired consequences in global oil supplies.

Back to Kenya. The formula introduced recently to cap price of oil products has to reflect real and continuous global oil price increases which are affecting the entire world, with no exception for Kenyans.

It is likely that we are yet to experience the worst in high oil prices.

As long as we do not have our own oil resources, we will have to absorb global price increases and plan how best to confront resultant adverse macroeconomic consequences.

However, what is happening in the Arab oil producing countries should serve as a wake up call to the Kenyan Energy minister to establish national strategic oil reserves to hedge the country against a potential serious global oil supply disruption.

Mr Wachira is director, Petroleum Focus Consultants. [email protected]