Oil Prices and Political Unrest
by Bill Chameides | March 2nd, 2011
posted by Erica Rowell (Editor)
Field of nightmares? The unrest in the Middle East and northern Africa is stoking fears of tightness and uncertainty, thus affecting oil prices. We take a look at why and what can be done. (Getty Images)
When the market opened on Monday, February 21, a barrel of U.S. crude cost $86 and change. By the end of the day, the price had shot up by six percent. On Tuesday, it climbed another seven percent before stabilizing in the $100-per-barrel neighborhood where it remains today.
As best as this humble scientist but non-economist, oil or otherwise, can tell, there is a pretty strong consensus among the world’s oil experts that that spike in U.S. oil prices was strongly influenced by the political turmoil that erupted in Libya.
Okay, obvious inference: what happens in Libya influences the price of oil we pay here in the United States. Another inference: we get a large share of our oil from Libya? As it turns out, not.
Where We Get Our Oil
The United States consumes about 7.5 billion barrels of oil a year, and imports roughly half of the crude we consume. From whence the imports? Check out the table below listing the top 15 exporters of crude.
|Source: Energy Information Administration’s 2009 data for crude oil (here and here). Note: Even though Libya, the world’s 17th largest producer, is a relatively small overall provider of oil on the global market, it is an important supplier of sweet crude which gives it a disproportionate influence on the global market.|
Note that for all the talk about Middle East oil, most of our imports don’t come from the Middle East. Roughly half comes from the Western Hemisphere (namely, Canada, Venezuela and Mexico). Libya, whose political turmoil was largely blamed for the recent jump in U.S. oil prices, supplies only 0.7%.
How can that be?
Our Relationship With Oil and Its Price: It’s Complicated
Here’s what this admittedly non-oil expert has concluded.
While there are many things that determine the price of oil futures* at the most basic level oil is a fungible commodity. bought and sold in the global marketplace. Whether we get oil directly from Libya or not, the price of U.S. crude will be susceptible to disruptions anywhere in the global supply chain. No matter what the price of any individual crude, once the global market even fears disruptions from a major supplier — like Libya — prices go up globally. Some crude types more, others less, but up they will go. Some refer to this as a “fear premium.”
Another layer of complexity gets added because there are different kinds of crude that pose different refining challenges and are better suited to different applications (e.g., low-sulfur “sweet crude,” like Libya’s, which is good for making diesel fuel, and high-sulfur “sour crude” like Saudi Arabia’s; light and heavy, etc.). Because Libya is a major supplier of sweet crude, a crisis there can raise the spectre of tightness and magnify the “fear premium” and that’s very likely what happened in this case.
The bottom line: as long as we import oil, we are hostage to what’s going on in the Middle East. And that has obvious national security implications.
So What Do We Do About It?
The Wall Street Journal weighed in on the matter in a recent editorial. The editors, concerned about the unrest in northern Africa and the Middle East spreading to Saudi Arabia — the world’s largest oil producer and a major U.S. supplier — suggested two measures: one) that Obama have a military plan to secure the Saudi oil fields, and two) that the president lift all impediments to domestic drilling.
As for option number one, I’ll leave it to the military folks to work out, and simply take note of the words of Defense Secretary Robert Gates (albeit speaking of possible military action in Libya for humanitarian reasons): “We … have to think about, frankly, the use of the U.S. military in another country in the Middle East.”
As for the second option: Producing more will certainly help, but by how much? With less than two percent of the world’s proved oil reserves, coupled with an appetite of 20 percent of the global supply [xls], is it likely we’ll be able to control the international price of oil? And at our current rate of consumption, is it reasonable to think that domestic production will be able to make a significant dent in our foreign oil dependence?
A third option our friends at the WSJ neglected to mention is to consume less. And one way to do that is to drive more fuel-efficient cars. But there may be a problem with that too — which is the subject of tomorrow’s post.
*Crude oil prices have spiked upward and downward repeatedly over the past six decades. (To get a good idea of these ups and downs, check out this New York Times graphic.) These swings can be attributed to a wide range of factors including world economic conditions and the value of the dollar, as well as geopolitical crises like the current turmoil in Libya. The spikes in price following an international crisis illustrate the rapidity with which fear-based disruptions can impact prices.filed under: economy, energy, faculty, oil
and: crude oil, economics, fear premium, fuel, Libya, markets, offshore energy, oil futures, oil imports, oil prices, oil resources, Saudi Arabia, T, top crude exporters, Wall Street Journal