Oil Prices May Hamper Confidence

Iraq oil field

Oil Prices May Hamper Confidence
| published June 24, 2014 |

By Thursday Review staff

Turmoil in the Middle East, tensions in the Ukraine, and subsequent fears about oil prices sent the stock market lower this week. Adding to market concerns is uneasiness about housing starts and real estate—still on uneven ground after a long winter and months of tightening credit.

June is usually a good month for many U.S. families, and it is traditionally a period of lower energy prices and the injection of disposable income into vacations, home repairs and retail activity. But uneasiness about the effects that rising gasoline prices might have on the wallet and the purse has put the brakes on some consumer spending, and has driven Wall Street into a gloomy state of affairs.

U.S. Secretary of State John Kerry is at the end of his second day of on-site negotiations and meetings with various leaders and officials in Baghdad. Kerry, acting on behalf of President Barack Obama, is seeking to diffuse a tense and potentially violent situation in Iraq and across the wider Middle East.

ISIS militants have—over the last ten days—swept almost unopposed across a wide tract of territory from northern Syria and northern and central Iraq. The radical militants have taken dozens of cities and towns, seized a variety of arms, weapons and vehicles, raided banks, and declared strict Islamic law along their path. ISIS has also fought for control of the massive oil refinery and distribution center at Baiji, and over the weekend ISIS fighters moved swiftly to seize control of border checkpoints and military outposts along Iraq’s borders with Syria and Jordan. ISIS says it plans to sweep further south across Iraq, taking Baghdad, and taking control of Iraq’s substantial oil well fields, refineries and pipeline systems.

With the Iraqi army in retreat, in some cases abandoning their positions, analysts worry that Iraqi oil production may face slowdowns, or even a complete shutdown, as violence spreads south toward the Persian Gulf and the border with Saudi Arabia. Iraq is the world’s second-largest producer of oil, and second only to Saudi Arabia.

Despite Kerry’s intervention, and the presence of about 300 U.S. Special Forces personnel, tensions continue to rise and violence grows. Reports that Syrian fighter jets bombed positions along its border with Iraq, even bombing some areas inside Iraq, and with the Jordanian government sending thousands of troops to its border, fears of a widespread war are accompanied by market worries about disruptions to oil supplies worldwide. In the context of potential oil and gas shortages in Europe, as a direct result of escalating tensions between the Ukraine and Russia, many economists and business analysts fear a ripple effect through a global economy still struggling to emerge from the Great Recession.

For about six weeks, housing analysts and real estate experts have also been concerned that the U.S. real estate boom of 2013 may have stalled. A severe winter suppressed construction and caused new home permits to come to a standstill, and it was widely believed that pent-up demand would reignite home building and real estate in the spring. But a combination of elements, including tighter credit and general economic worries by many Americans, had slowed the housing market in March and April. Home starts and home sales are generally regarded as a key measurement of the U.S. economy’s overall health.

The good news is that the Commerce Department’s most recent figures show that purchases of new homes rose in May, and the rise in the sale of previously-owned homes was the best since October of 2013. To some economists this is a sign that despite worries about gas prices at the pump or energy costs at home, Americans are confident enough to wade back into the real estate market in larger numbers than over the long winter.

Related Thursday Review articles:

The Cost of Iraq's Fragmentation; R. Alan Clanton; Thursday Review; June 24, 2014.

Iraq Violence Means Higher Oil Prices; Thursday Review; June 20, 2014.