Impact on the Oil Market of a Series of Events - Term Paper Example

In an essay format, analyse the impact on the oil market of: a. the ‘revolutions’ in the oil producing Arab countries, particularly in Libya, b. the emergence of Iraq as a major oil producing country, and c. the release of the IEA emergency stocks 1. Introduction Oil market is strongly depended on the economic and political conditions globally. Indeed, it has been proved that during periods of such crises the oil production and the oil prices are affected – more or less, in accordance with the position of the country involved as a global oil exporter. Current paper focuses on the impact on oil market of three particular events/ factors: the Libyan crisis, the emergence of Iraq as oil producing country and the release of the IEA emergency stocks. The review of the literature (mainly reports and statistics) published in the specific field reveals that these events have highly affected oil market globally; the effects of these events on the global oil market have been differentiated but they are all based on similar characteristics: when political, economic and social crises appear in countries with an important presence in oil exports internationally, the effects on the global oil market are unavoidable. Under certain terms, the development of initiatives for controlling the effects of these crises on the oil market may not have the expected results – referring to the case of the release of the IEA emergency stocks. It is made clear that the stabilization of oil market internationally is related to the existence of strategies that can ensure the independency of this market from a particular country. For instance, a mechanism should exist ensuring that the IEA stocks are increased at such point that global demand on oil is effectively covered even in case of strong crisis in one or more countries – oil exporters. 2. Impact on the oil market of a series of events 2a. The ‘revolutions’ in the oil producing Arab countries, particularly in Libya Libya is considered as the 17th major oil exporter globally (Nasad 2011). The country exports oil in numerous countries; the major amount of oil exported from Libya goes to Italy (38%). Since the beginning of political and social conflicts in Libya, the price of oil globally has been affected. In accordance with Nasad (2011) before the conflicts ‘Libya pumped out 1.6 million barrels per day’ (Nasad 2011). Today, several months after the beginning of the crisis, the amount of oil that is extracted daily reaches just the 100,000 barrels daily (Nasad 2011). Regarding the effects of the crisis on oil prices globally, the following issues need to make clear: a) Libya produces Brent crude oil, so that it is this type of oil the price of which has been most affected by the crisis; this fact is reflected in Figure 2 – Appendix – where the prices of Brent crude oil and WTI crude oil for the last 12 months are presented, b) the effects of the crisis on the price of Brent crude oil have not been standardized; during periods where the existing regime seemed to win, the above price was increased; in periods that the power of the rebels was increased the price of Brent crude oil was decreased (Figure 2, Appendix). The above fact reveals that the international community regards the existing regime as being less willing to coordinated with countries globally – so that an effective arrangement on oil prices to be developed. Rather, the international community seems to consider the change of existing regime as the only solution for the development of stable commercial relationships with Libya. When referring to the revolution in Libya and its impact on the oil market reference is made to a variety of sectors/ facts: a) the reduction of oil pumped across the country, b) the need for increase of oil exports from other countries, c) the need for alteration of operations of foreign firms activating in the region; in the case of Libya, because of the crisis, the foreign enterprises operating in the country, like Royal Dutch Shell, BP and Italian Oil and Gas company, had either suspended or alternated their activities in order to protect their employees (Best Growth Stock 2011). From another point of view, the political crisis in Libya should be considered as related to the political and social instability of neighbouring countries where such conflicts primarily appeared – reference could be made especially to Egypt and Tunisia (Katusa 2011); this view is similar with that of Al Fathi (2011) who noted that ‘three revolutions in 40 days are too much for the oil market, especially when none of them is yet over’ (Al Fathi, February 28, 2011). In accordance with this view, the fluctuations in oil prices globally are not unexpected but resulted from specific political initiatives, though it is not clear whether these interests are local or foreign. At the same time, reference should be made to the following point: the crisis in Libya has been combined with the crisis in several others countries – of the north Africa and the Middle East – and it is for this reason that the effects of this crisis on oil market have been severe (Katusa 2011). Another important point of the revolution in Libya is the following one: the specific revolution has caused turbulences in the global market but the revolution itself has been a ‘vehicle’ for establishing new rights on the country’s oil market. This fact is reflected in the following event: in the context of the crisis, in April 2011, the rebels announced that they managed ‘to export their first cargo of oil into the international market’ (Beard 2011). In a report published in March 2011 by Economist, emphasis is given on the role of oil in the development of turbulences for the global economy. It is explained that these turbulences are likely to appear every time that the oil production is reduced – or such threats exist. Moreover, it is noted that the stabilization in the oil production is difficult to be achieved – especially because of the fact that the oil production internationally is depended – the 1/3 of this production – on regions which tend to develop political and social conflicts, meaning the Middle East and the North Africa (The Economist 2011). It is in this context that the role of Libya in the appearance of turbulences in the global oil market should be evaluated. In accordance with the particular report, the crisis in Libya has affected the global oil market but these effects have been rather modest – compared to other similar crises worldwide. Indeed, during the development of violence in Libya, the price of Brent crude oil reached an increase of 15% but, shortly, the price reduced again, since Saudi Arabia announced the increase of its oil production (The Economist 2011). In other words, despite the fluctuations in the prices of oil globally since the beginning of political conflict in Libya, the crisis in Libya has proved the ability of the international community to control the price of oil in cases of crises in countries – oil exporters. 2b. The emergence of Iraq as a major oil producing country The role of Iraq in the stabilization of the global oil market is quite important. This fact is highlighted in the study of Hamilton (2011). The above researcher examined the history of the oil market – as related to various events the last 50 years. He came to the conclusion that the Suez Crisis of 1956 is the event that mostly affected (negatively) the global oil market causing a lost output in oil at a percentage of 10%. However, the conflicts in which Iraq participated have led, if regarded as a whole, a major damage on the global oil output. Indeed, the Iran-Iraq war of 1980 caused a loss in oil output of 6%, the Gulf War of 1990 led to a limitation of the global oil output of 9% while the Persian Gulf War II (along with the crisis in Venezuela) in 2002 resulted to a reduction of the global oil output of 4% (Hamilton 2011). In other words, the military, social and political conflicts in Iraq have led to a loss of the oil output at a percentage of approximately 19% - much higher than any other crisis in countries-oil exporters internationally. It is clear that political and social conditions in Iraq strongly affect the global oil market; however, Iraq is an important oil exporter, having the 12th position in the relevant list globally (Nasad 2011). This means that ignoring the political and social problems in Iraq would result to further problems in the oil market globally. In accordance with Mabro (2008) when referring to the impact of political crises on the oil market, the following fact needs to be made clear: political crises can either affect the local production of oil or the global oil supply. In the first case, the effects of the crises can be controlled while in the second case, the damage in the global economy can be significant. From this point of view it is explained that the Iran-Iraq war did not affect the oil prices globally ‘because it happened at a time when world demand was stagnant’ (Mabro 2008, p.6); in 2003 also, when ‘USA invaded Iraq’ (Mabro 2008, p.6), no increase in the oil prices globally occurred; however, the invasion of Iraq in Kuwait in 1990 led to the increase of global oil prices. The impact of Iraq on the global oil market is reflected in Figure 3 (Appendix); through the relevant diagram it is made clear that during the conflicts related to Iraq – such as the Iran-Iraq war, the invasion of Kuwait and the Gulf war – the ‘world excess production capacity’ (Williams et al. 2003) has been decreased – leading to the increase of oil prices globally. On the other hand, the dependency of USA on oil has been increased; in accordance with the diagram presented in Figure 4 (Appendix), this dependency has been high in periods when events related to Iraq took place – a fact proves the importance of Iraq oil exports for USA. On the other hand, Middle East is an area characterized by strong political turbulences. In terms of its economy (meaning its GDP) the region is not a threat for the global market; indeed, the economy of Middle East is just ‘one-fifth the size of the U.S. economy’ (Newman 2011). This means that any turbulence in the region’s economy could not lead to a global financial crisis. However, when referring to oil, the position of Middle East in the global market is differentiated. Middle East ‘accounts for 30% of oil production globally’ (Newman 2011). It is assumed that any political or social crisis in the region can harm – severely – the global oil market at the level that the activities related to the extraction, processing or export of oil are delayed or cancelled. The changes in the oil prices of USA – indicatively – in the context of the political crises globally are made clear in Figure 5 (Appendix). 2c. The release of the IEA emergency stocks The release of IEA emergency stocks is often used a strategy for controlling the high increase of oil prices globally. The specific strategy is commonly used during periods of strong political or social crises in countries-oil exporters aiming to decrease the effects of these crises on the global oil market. In June the 23rd, IEA ‘announced a release of 60 million barrels of government-held stocks over the next 30 days’ (Gibbons 2011). The above initiative aimed to cause the reduction of oil prices globally; however, not all financial institutions – that produce oil prices forecasts – were persuaded on the potentials of oil prices to be stabilized through this initiative. In fact, the Bank of America Merrill Lynch avoided to change its forecast for oil prices in the second half of 2011 (Gibbons 2011) – in accordance with the above forecast the oil price for the particular period is expected to be ‘at the level of $102 a barrel’ (Gibbons 2011). Other financial institutions have amended their forecasts regarding the oil price, for example JP Morgan reduced its forecast to $100 compared to $130, as the oil price was developed under the influence of the continuous crises in North Africa and Middle East (Oil com 2011). In the relevant announcement of IEA published in 23 June 2011 it is noted that the above initiative has the support of 28 members of IEA (IEA 2011). It is also noted that through this initiatives the increase of oil prices because of the crisis in Libya will be avoided (IEA 2011). In accordance with a report published in Economic Times (2011) the particular initiative has been just the third of this type developed by IEA, during the 37 years that the above organization operates; this fact shows the level of emergency – in terms of oil prices globally – related to the crisis in Libya. It should be noted that no further release of emergency stocks has been decided by the above organization – despite the continuous expansion of the crisis in Libya – since no need for such initiative has been identified, as the issue has been set again for discussion in July 21 (Tsukimori et al. 2011). 3. Conclusion The development of political crises in countries-oil exporters affects the global oil market. The extension and the duration of this impact depend on the time required for the response of the global community, the initiatives of local authorities but also the conditions of the global economy – which can allow or not high risks in oil market. In the case of the events analysed in this paper, the power of political crises to affect the global oil market has been differentiated. It is for this reason that different measures have been decided by the global community – for instance, in the crisis of Libya a release of stock has been decided by IEA, a decision rather difficult to be taken, having in mind that only in 3 similar crises the above organization had decided to proceed to such solution. On the other hand, the relationship between the oil market and the countries – oil exporters is not standardized; other countries can affect the global oil market directly – as in the case of Libya – while others can have such impact only in the context of the political conditions of their greater region – as proved in the case of Iraq, as part of the Middle East. In any case, revolutions in countries – oil exporters should be treated carefully by the international community; under certain terms, waiting for the crisis to be resolved locally is more preferable compared to the development of an initiative that may worsen the problem. References Al Fathi, S. (2011) Revolutions cause ripples in oil market. Gulf News. Online, available from Beard, S. (2011) Gaddafis oil revolution. American Public Media. Online, available from Berkmen, P., Ouliaris, S., Samiei, H. (2005) The Structure of the Oil Market and Causes of High Prices. International Monetary Fund (IMF). Online, available from < http://www.imf.org/external/np/pp/eng/2005/092105o.htm> Best Growth Stock (2011) Escalated violence at Libya effect global oil supply, online, available from Gibbons, R. (2011) Brent falls as euro zone woes, dollar pressure. Reuters. Online, available from Hamilton, J. (2011) Libya, oil prices, and the economic outlook. Econbrowser, online, available from < http://www.econbrowser.com/archives/2011/02/libya_oil_price.html> International Energy Agency (IEA) (2011) IEA makes 60 million barrels of oil available to market to offset Libyan disruption. Online, available from < http://www.iea.org/press/pressdetail.asp?PRESS_REL_ID=418> Katusa, M. (2011) The Libyan Crisis: Where Are Oil Prices Going? Online, available from Mabro, R. (2008) On the security of oil supplies, oil weapons, oil nationalism and all that. Blackwell Publishing. Online, available from < http://www.relooney.info/0_New_8466.pdf> Marcel, V., Mitchell, J. (2003) Iraq’s Oil Tomorrow. Online, available from Nasad, N. (2011) Libyan Rebels Take Tripoli, A Look at the Impact on Oil Prices. International Business Times, online, available from < http://www.ibtimes.com/articles/201743/20110822/libyan-rebels-take-tripoli-a-look-at-the-impact-on-oil-prices.htm> Newman, R. (2011) How Arab Unrest Could Harm the World Economy. US News. Online, available from < http://www.usnews.com/mobile/blogs/flowchart/2011/2/18/how-arab-unrest-could-harm-the-world-economy.html> Oil com (2011) IEA to release emergency oil stocks in the global market. Online, available from The Economic Times (2011) Oil recovers to $107, IEA release impact fades. Online, available from The Economist (2011) The 2011 Oil shock. Online, available from < http://www.economist.com/node/18281774> Tsukimori, O., Boselli, M. (2011) Oil consumers decide against new stocks release. Reuters. Online, available from Williams, J., Alhajji, A. (2003) The Coming Energy Crisis? Online, available from Appendix Figure 1 – Oil exports from Libya (Source: Nasad 2011) Figure 2 – Oil prices globally in the last 12 months (Source: Nasad 2011) Figure 3 – World excess production capacity vs oil prices (Source: Williams et al. 2003) Figure 4 – US Supply Shock Vulnerability (Source: Williams et al. 2003) Figure 5 – US Crude Oil and Gasoline Prices (Source: Berkmen et al. 2005) Read More