Cost, Conflict, and Climate: US Challenges in the World Oil Market - Essay Example

Oil and Gas The price of oil has constantly fluctuated through the years, but never more so than in the past ten years. This erratic trend has caused many changes to the economic and political climate. The prices of commodities have also fluctuated because of oil price changes. Political tensions between and among countries can trace their origin to oil price fluctuations. In some instances, these tensions have resulted to actual conflicts and show of arms. And in other instances, it has potentially created fodder for wars and violence. This paper shall discuss the thesis that worldwide conflict is the cause for the constant fluctuation of oil prices. History has been riddled with many incidents of oil price increases due to conflicts and fighting between and among countries. Emily Witten (2008) documents the history of oil price increase and is hereinafter summarized. In the 1970s, oil price increased to as much as $46 a barrel when the OPEC imposed an embargo on the U.S. and its allies for the latter’s support of Israel in the Yom Kippur War. In order to keep up the high prices of oil, the OPEC even decreased oil production. In 1978, when the Shah of Iran was deposed from power and a radical Islamic government was installed, oil prices rose to $42. In the 1980s, oil prices decreased as many Western countries made an effort towards conservation, however, these efforts were thwarted when Iraq invaded Iran and oil prices rose to $86 per barrel. Following the September 11 terrorist attacks in the United States, oil prices increased from $21 to $26. The U.S. invasion of Iraq in 2003 sparked another increase in oil prices from $32 in 2004 to $60 in 2006. Interspersed in these oil price increases were efforts towards conservation and peace which noticeably settled or decreased oil prices. However, the trend became clear, whenever there were conflicts between nations, oil prices went up. In the case of Colombia, oil facilities have been under constant threat of attack by guerilla groups in the region. Attacks on oil installations and civil conflicts in the region have made oil-importing countries like the United States concerned about oil supplies. These oil importing countries opined that “attacks on energy infrastructure in Colombia, and especially the implications of Colombian instability for the broader energy-rich Andean region, pose a threat to a key source of oil supplies” (Dunning & Wirpsa, 2004). These conflicts, in the light of the September 11 attacks on American soil gave license to the US to send military troops in the region, with the aim of combating terrorists. Civil tension is always high in this region, with the ever present threat of violence breaking out. And with oil supplies and production threatened, oil prices are very much unstable. Civil and political instability is also rife in Venezuela, which is regarded as the fourth largest oil supplier to the US. The coup d’etat against President Hugo Chavez, the 2002 general strike in the country, and the conflict in the Middle East effectually drove oil prices up to $36 per barrel. Tension between President Chavez and the US has been ever present due to the latter’s policy in Latin America. Some analysts claim that “global prices hovering around $40 per barrel could increase the bite of sanctions aimed at persuading Iran to give up its nuclear program, and could shake the government of Venezuelan President Hugo Chavez, who has been an irritant to US policy in Latin America” (Iran Press, 2009). As oil production is declining in the Middle East, many nations have turned their attention to other countries like Nigeria and other parts of West Africa as viable sources of oil. However, an attack by Nigerian rebels of a Shell offshore platform “cast doubt on whether oil companies will continue investing billions of dollars in a region plagued by violence and corruption” (Richter, 2008). The rebels were adamant in expressing their outrage on the fact that their country was allegedly not sharing in the profits of the oil companies operating in their region. However, many politicians claim that the rebels were not driven by their principles or moral outrage, but they were driven by their greed and their own economic goals. These rebels learned to siphon oil from oil wells and platforms and to sell it in world spot oil markets. Disruptions brought on by conflicts demonstrate that the oil market is very sensitive to conflicts. Security threats and outbursts of violence have disrupted oil flow from countries like Nigeria, Iraq, Colombia, and the Middle East and since 2005 have cut 20% to 30% from Nigeria’s oil output (Richter, 2008). The Nigerian conflicts have prompted many world leaders to call on the Nigerian government and insurgents to quickly resolve their issues. OPEC officials also claim that as the conflict in the Middle East is continuing to escalate, so do the oil prices. They emphasize that “oil prices are affected by political issues” (Gilford, as quoted by Baines, 2009). Disruption of oil supply causes tension in the country and consequently causes erratic oil prices. Iran is being pressured by the United Nations and its member nations to freeze their nuclear program. When, Iran subsequently expressed its willingness to discuss the issue with the UN, oil prices in Asia fell slightly. However, when Iran reiterated its intentions of improving its nuclear capabilities, the oil prices rose. Iran contends that it is unfair for the US to demand that it dismantle its nuclear program when the US itself is not dismantling its own. In the meantime, this tension between Iran and other Western nations is causing oil prices to go up. Many analysts believe that “if nothing further happens to shake buyer confidence, the oil prices will settle at around $70 per barrel” (International Finance Daily, as quoted by People’s Daily Online, 2006). However, with the Middle East very much embroiled in conflict, many officials and analysts believe that oil prices are from settling. The Israeli-Palestinian conflict has also caused the fluctuation of oil prices. As was mentioned earlier, in the 1970s, the OPEC itself used oil as a weapon of war and leverage when it asked its Arab members to stop sales to countries that supported Israel in the Middle East War. The action of the OPEC increased oil prices, created long lines in gas stations, and caused massive inflation all over the world. And a new conflict in the Middle East due to the US-Iranian nuclear issues is more likely to drive the prices of oil to $250 per barrel, if, as some political analysts claim, “the United States is crazy enough to invade Iran” (Correa, as quoted by Williams & Chmaytelli, 2007). However, some leaders take issue with Correa’s comments claiming that Iran and Venezuela are just trying to persuade other OPEC members into the conflict by trying to appeal for solidarity against the alleged imperialistic practices of the US and other Western nations. Other more conciliatory members of the OPEC insist that OPEC’s involvement in political activism is over, and they are urging their members to stop using oil as a political weapon. Oil prices rose to nearly $40 a barrel when tension broke out between the Israelis and the Palestinians. Crude oil also rose from $1.99 to $39.70 a barrel based on electronic trading numbers. Israel expanded its attack on the Hamas leaders and earned the ire of many Arab leaders. The Gaza Strip does not actually have working oil wells, and the Hamas does not have the capability of striking tankers in the Strait of Hormuz, however, those who control the oil market are bidding up the price of crude oil. The Strait of Hormuz, a waterway connecting the Persian Gulf to Europe, Asia and the Americas is in constant danger of attack and is being caught in the crossfire between the Hamas and the Israelis. Political and economic analysts stress that the Israel-Palestinian conflict is making many people nervous. “Just a few days ago, crude was going for $33 a barrel and now it’s going on $48, so people need to realize that they need to pay attention to this stuff on the evening news because it hits you in the pocketbook” (Laskowski, as quoted by Vanderhoof, 2009). The Russia and Georgia conflict also created a surge in the price of oil. The conflict closed down shipments from two Georgia ports – Batumi and Kulevi and as a result, the market closely observed what was happening in the region. “Light, sweet crude for September delivery rose 79 cents to US$115.99 a barrel in electronic trading on the New York Mercantile Exchange by noon in Europe” (Associated Press, 2008). Although Georgia is not a major producer of oil, the region is considered a major oil transport link through Europe. Georgia is backed by the US as a transit point for oil from the Caspian Sea, bypassing Russia. And the fighting that broke out in the region increased concerns that the Baku-Tbilisi-Ceyhan pipeline that runs through South Georgia, from Azerbaijan and into Turkey, carrying 1.2 million barrels of oil per day would be disrupted (Oil Voice, 2008). The oil was at a 14-week low when the fighting broke out and the disruption in the delivery of oil and oil products caused the prices to, once again, increase. Tension heating up in Iraq between Turkey and the insurgent Kurdish Worker’s Party; Putin’s visit to Tehran; and the U.S. conflict with Iran concerning the latter’s nuclear weapons were all factors contributing to the October 2007 oil price increase. The oil deliveries from Iraq and Turkey are actually negligible compared to the worldwide production; however, oil prices are very much affected and controlled by politics rather than economics. “There is increased demand and certainly the Turkish issue is being seen as an excuse rather necessarily a reason” (Stewart, 2007, as quoted by The European Weekly, 2007). Some analysts also claim that oil prices could easily go up to $100 a barrel because of the tension, even if oil supply is actually high. Worldwide conflicts such as those illustrated above have caused oil prices to fluctuate. The constant conflicts between the Western nations and the oil-rich Middle East countries are causing oil prices to rise. Conflicts in Russia, Georgia, Israel, Colombia, Venezuela, Nigeria, and other oil-producing nations have effectually blocked the transport of oil to oil-importing nations. The oil market is constantly watching, wary of these conflicts, and driving up the prices of oil to new highs. Works Cited Baines, M. (8 January 2009) Middle East conflict driving up pump prices. Godan River News. Retrieved 29 January 2009 from http://www.godanriver.com/gdr/news/local/rockingham_news/article/middle_east_conflict_driving_up_pump_prices/8390/ Borenstein, S. (June 2008) Cost, Conflict, and Climate: U.S Challenges in the World Oil Market. University of California Energy Institute. Retrieved 29 January 2009 from http://www.ucei.berkeley.edu/PDF/csemwp177.pdf. Conflict between Russia, Georgia and Ossetia sends oil prices up (11 August 2008) Associated Press. Retrieved 29 January 2009 from http://english.pravda.ru/news/business/11-08-2008/106055-oil_prices-0 Crude Oil Prices Jump after Russia-Georgia conflict (12 August 2008) Oil Voice. Retrieved 29 January 2009 from http://www.oilvoice.com/n/Crude_Oil_Prices_Jump_after_RussiaGeorgia_Conflict/6d8ada0e.aspx Dunning, T. & Wirpsa, L. (2004) Oil and the Political Economy of Conflict in Colombia and Beyond: A Linkages Approach. Santa Fe Institute. Retrieved 29 January 2009 from http://www.santafe.edu/files/gems/obstaclestopeace/wirpsadunning.pdf Iranian Nuclear Issue Causes Oil Prices to Fluctuate. (24 August 2006) International Finance Daily. Retrieved 29 January 2009 from http://english.peopledaily.com.cn/200608/24/eng20060824_296496.html Israel-Gaza Conflict Sends Oil Back Up. (29 December 2008) Short News. Retrieved 29 January 2009 from http://www.shortnews.com/start.cfm?id=75799 Oil Price weakness pressures Iran, Venezuela (16 January 2009) Iran Press. 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Bloomberg. 29 January 2009 from http://www.bloomberg.com/apps/news?pid=20601087&sid=aNmE.oybx0H0&refer=worldwide Witten, E. (3 January 2008) History of Oil Prices. Energy Lawyer. Retrieved 29 January 2009 from http://energylawyer.blogspot.com/2008/01/history-of-oil-prices.html Read More