Oil and Gas Prices: One Crisis at a Time

oil well

image courtesy of Microsoft

Oil and Gas Prices: One Crisis at a Time

By Thursday Review staff | published June 17, 2014 |

When it comes to energy prices—and issues of supply and demand—when it rains, it pours.

Fears that the nation of Iraq may collapse as ISIS militants move with lightning speed across much of Iraq’s northern provinces have already begun to drive oil prices upward. Even if the jihadists fail to take control of Baghdad, many analysts see little chance that Iraq will remained unified, and areas which have now fallen under the control of ISIS may never be regained by the Iraqi army or security forces. Many of these areas are among the most productive sources of oil in the Middle East.

Adding to the fears, some intelligence and military analysts are worried that ISIS already has its sights set on Saudi Arabia (see Iraq’s Collapse: Consequences for Saudi Arabia; Thursday Review; June 16, 2014). ISIS forces now control a vast swath of territory from Syria’s border with Turkey across to within about 80 miles of Baghdad, and the militants continue to move quickly to take control of even more towns and cities in Iraq. Reports that ISIS elements have begun circulating leaflets and handouts in Saudi Arabia—leaflets warning of the coming disruptions and asking young men to volunteer to join its militant cause—have some analysts concerned that a newly organized jihadist movement may gain enough strength to attempt to topple the Saud-family controlled government in Saudi Arabia.

Saudi Arabia is the world’s largest supplier of oil, producing between five million and nine million barrels a day. Concerns about oil fields in Iraq and Saudi Arabia have already begun to nudge energy prices upwards.

CBS News and other press agencies were reporting that some of the general panic over oil supplies may be offset by the news that the U.S. was sending in a small contingent of 275 Special Forces soldiers and officers to assist the government in Baghdad with regaining stability. This news apparently calmed the oil markets, helping prices to stop an upward climb.

But fears of a disruption in Iraqi oil production persist, and some energy analysts say a modest increase is certain this summer.

But the rapidly-moving events in the Middle East are not the world’s only sources of tension. In the six-month old crisis in the Ukraine, where the country has effectively divided itself into pro-Russian and pro-Ukrainian sections almost evenly along the Dnieper River, new tensions have already raised the stakes to levels certain to have economic shockwaves across Europe.

Despite attempts to forge a consensus for a cease-fire, Russian President Vladimir Putin has ordered all oil and natural gas supplies shut off to the Ukraine, even after the Ukraine agreed to pay off part of its existing debt to Russia. Though Ukrainian reserves of gas and oil are sufficient to last through late December, the wider fear is that a military standoff could last for many months. And though European supplies will be affected only slightly (for now), the struggling economies of many European countries need little provocation to disrupt recovery from the recession.

The escalating tensions in the Ukraine began when massive demonstrations in Kiev turned violent, culminating in the ouster of Ukrainian strongman Viktor Yanukovich, a Moscow ally. Putin and his cronies in the Kremlin were unhappy with Yanukovich’s outster, and send in troops to seize the Crimea region on the Black Sea, an area crucial militarily for its ports and naval facilities. In the weeks that followed, tensions grew worse as heavily armed militants and separatists began to seize control of cities and towns in eastern Ukraine. Putin ordered a massive military buildup along the border between Russia and the Ukraine, and there was widespread fear that Russian troops, tanks and other equipment would roll across the frontier. The war of words between U.S. President Barack Obama and Russian President Putin escalated into sanctions by both sides.

Many Ukrainians living in the western part of the country feel a cultural and economic kinship with Europe and its trading partners, whereas many who live east of the Dnieper feel a closer alignment with Russia. Language differences also tend to break along those same geographical lines.

Though Obama has delivered strong words on the crisis, some European leaders have treaded more carefully and delicately. Though they oppose Russian interference in the Ukraine, there are greater fears of a wider war.  Western European countries are especially concerned that market disruptions will slow or stall economic recovery, and some European leaders worry more about the shockwaves which would result from oil and gas supplies being cut off. Even if Russian oil and gas supplies to Europe are only partially disrupted, it will drive demand up for alternate sources. This means higher prices worldwide.

In the United States, an oil price increase may further dampen economic recovery, where a variety of factors are keeping American consumers from spending money, including tight credit on new homes, rising food and grocery prices, and uneasiness about both jobs growth and earnings.

Combining the tensions in Ukraine with Putin’s insistence that oil and gas supplies be cut off, and adding to the mix anxieties about the rapid advancement of ISIS forces across large tracts of Iraq, world oil prices are sure to see an increase over the next few weeks.

Related Thursday Review articles:

Iraq’s Collapse: Consequences for Saudi Arabia; R. Alan Clanton; Thursday Review; June 16, 2014.

The Economy: Good News, Bad News; Thursday Review staff; Thursday Review; April 28, 2014.