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IEA: OPEC Can’t Save The Oil Market

James Hamilton

James Hamilton

James is the Editor of Econbrowser – a popular economics blog that Analyses current economic conditions and policy.

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How Events in Syria Affect the Global Oil Markets

The growing likelihood [1], [2], [3] of U.S. military action in Syria seems to be one factor in the recent sharp rise in oil prices.

NYMEX Crude Oil Futures
Source: WTRG.

That is not because Syria itself is an important producer of oil. According to the EIA, the country was producing less than 370,000 barrels a day in 2010, only half a percent of the world total. Civil unrest and an embargo had brought that down to 71,000 barrels this May, less than 1/10 of 1% of global supplies. If that goes too, nobody but the Syrians will miss it.

 Middle East
Source: Google maps.

But the question is whether conflict would be neatly contained within Syria. The situation in Egypt, for example, remains quite unstable, and it would not take much to set it off again. Egypt is also a relatively minor contributor to world production. But the Suez Canal and Sumed pipeline together transport 3.5 million barrels of crude petroleum and refined petroleum products through Egypt each day, a number that would correspond to 4.6% of total world field production of crude oil.

Related article: Tight Global Oil Supplies Turn Syria into an International Problem

Suez Canal and Sumed Pipeline
Source: EIA.

Libya may already be tipping. The country was producing 1.9% of the world's total last May, but worker strikes and armed occupation of energy infrastructure may have brought the country's recent production down to 250,000 b/d.

Oil Profuction

Iraq currently produces 4% of the world total and is a critical component in many analysts' scenario for how world production will continue to grow over the next few years (some of which extra production had been intended for planned pipelines through Syria). But dozens of people are being killed daily in Iraq's violence. And the Wall Street Journal reported this information on Friday:

The U.S. has intercepted an order from Iran to militants in Iraq to attack the U.S. Embassy and other American interests in Baghdad in the event of a strike on Syria, officials said, amid an expanding array of reprisal threats across the region.

Saudi Arabia backs action against Assad, so the kingdom might try to increase production to offset losses from the above possibilities. But how much the kingdom is able to do, even if it is willing, is not clear. More importantly, Syria is part of a broader struggle between Saudi Arabia and Iran. If events were to lead to disruptions in either of those countries, the effects on oil markets would be quite dramatic.

Related article: Looking for the Next Mega Oil Play

To put these numbers in perspective, the table below summarizes the major geopolitical disruptions in oil-producing countries over the last 40 years. The Libyan disruptions two years ago took about 2% of world production offline, and were associated with a 20% increase in crude oil prices. The combined effects of strikes in Venezuela and the Second Persian Gulf War in 2002-2003 took away 4% of global production, and oil prices were up 35% at the highest point. Neither of those events were associated with significant downturns in the world economy.

Oil Embargos

On the other hand, the first four events listed above took out 6-9% of world production. These were accompanied by oil price spikes of 50% or more, and each of these was followed by a global economic recession.

Of course, another possibility is that the world will become a safer, more stable place if the U.S. launches a few cruise missiles on Damascus.

By. James Hamilton


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