Threats to the Global Oilconomy

About 70 percent of the known commercially available reserves of conventional oil (global total: 1.3 trillion barrels) are to be found in North Africa and the Middle East. Ten of the top 20 oil exporters in the world are from there and they export about 18 million barrels of day out of the 85 million barrels a day that go into the global oil market. About 30 percent of all of the liquid fuels production of the world comes from North Africa and the Middle East.

Some of the most vulnerable transport choke points for oil are found in the region, such as the Straits of Hormuz between Iran and Oman, the Bab Al Mandab off failing Yemen, the Suez Canal, and Sumed pipeline in Egypt, and many pipeline systems across the region.

Other parts of the oil infrastructure of the region are more vulnerable to attack than some may think. Some of these include the Ab Qaiq facility in Saudi Arabia, which Al Qaeda tried to attack a few years ago, the Al Basra and Khor Al Amiyya oil terminals in Iraq, Kharg Island in Iran, Ras Tanura in Saudi Arabia and so many more.

Then there are numerous pipelines and tanker routes in the region that also contain serious vulnerabilities. Instabilities in the countries that contain or bookend these transport chokepoints, pipelines, tanker routes, and vital, yet stunningly potentially fragile facilities, could have strong effects on oil prices, especially if they occur in sequence, simultaneously or as part of a further expansion of “The Arab Spring.”

Then there is the massive wild card of potential sectarian war in the region, or even beyond. Bahrain is not a large oil producer or large oil exporter, but it is a strategic focal point for the growing tensions between the Sunni and Shia worlds, and between the Sunni leaders in the Arab world and the Shia leadership in Iran.

The combination of sectarian tensions within and across the states of this region mixed with oil could prove to be explosive beyond any common expectations to date.

Lebanon, Syria, Iraq, Saudi Arabia, Yemen and many other countries of the region will need to do much to help resolve these tensions or deal with the situation in productive and forward looking ways—or the world will suffer greatly from the potential conflicts that could be on the way. When the Saudi troops went into Bahrain this was more than a neighbor sending in help to the ruling Al-Khalifas. It was a sharp signal to Iran.

A huge elephant in the room is Saudi Arabia, the largest holder of conventional oil reserves and the biggest producer of oil in the world. Saudi Arabia’s Shia population lives mostly in the east where its biggest oil fields are—and right across the causeway from Bahrain. There were disturbances in Qatif, Saudi Arabia, that many clearly link to the problems in Bahrain—and to Iran. If these tensions build to a series of explosion points in the region then all bets are off about what could happen to oil markets.

Let us all hope and pray this does not happen. The entire world would be deeply affected by this and in many profound economic, political and even cultural ways. Think of the potential unemployment, recessions, and political instability that could result from huge and rapid increases in the prices of petrol globally.

But such threats to the oil markets are not just to be found in the Middle East and North Africa. There are the threats of growing instability in some of the rest of the top 20 oil exporters, such Nigeria, Venezuela, and Mexico. Nigeria has a restive Niger Delta and the MEND as well as its own sectarian violence, numerous tribal tensions, massive corruption, and a fragile political and social system.

Venezuela’s PDVSA production has been in decline for years due to poor management practices, underinvestment in exploration and production, and the extraction of most of the net revenues of this national oil company for the “socialist” agenda of Huge Chavez, the results of which are increasingly in question by the people of the country.

Mexico has had sharp decline in is oil production in recent years. It is also a country with severe problems with drug gangs, violence, poverty, corruption and more. It is a state right next to the United States that should be worrying the people in the US and the world a lot more than it seems to be.

Russia, Angola, Kazakhstan and Azerbaijan, also countries on the top 20 list of oil exporters, are not exactly without the threats of instability in the coming years.

Then there are the demand side risks that could whipsaw the markets from a different angle. Many of those demand side risks will come out of the growing emerging markets with potentially huge increases in oil demand, especially from China and India. Japan will also see significant increases in oil demand as it rebuilds from its multiple disasters.

The summer driving season in the US approaches as well. If these demands ramp up at the same time further political and supply shocks happen in the North Africa and the Middle East, or elsewhere, then we could be in for a very expensive summer globally. Oil markets are global markets and we are truly all in this together.

Speculative markets that feed off of (mostly guessed at) supply and demand shocks, as well as the psychology of the markets and political events could also add to the uncertainty and increased turbulence in the oil markets. Speculative markets also feed off of and pump up prices of oil by playing uncertainty itself and the jitteriness of the markets. They also can “play the gap” between different types of oils.

A huge proportion of the world economy is based on oil. It is truly a “Global Oilconomy,” and the next few months or couple of years could see its biggest tests so far.

The implications for oil producers and oil consumers could be epochal.

(Professor Paul Sullivan teaches at National Defense University and Georgetown University in Washington, DC. He can be reached at: [email protected])