Oil, Arab Spring, and Unforseen Consequences

In December 2010, analysts predicted a rise in oil prices when “Arab Spring” began with public demonstrations in Tunisia. As more countries joined the movement, it seemed like a safe bet. History shows that political instability in oil producing countries always leads to decreases in oil production with corresponding price hikes. Then, as the pro-democracy demonstrations spread to Oman, Yemen, Egypt, Syria and Morocco, oil markets braced for a new, record high price or spike. It didn’t happen. Why?

The initial assumption that countries in political turmoil experience oil production declines turned out to be true. In 2011 and 2012, oil production across North Africa and the Middle East fell. In 2013, the year-on-year production declines continued in these countries: skipchart Recent coalition bombing in Syria and Iraq can only continue to decrease oil supplies. Meanwhile, world oil prices over the same period of time remained relatively stable and are now in decline. Brent cycled around $110 per barrel.2 US domestic prices adjusted for inflation in January 2011 averaged $89.72; by February 2014 the price rose to a modest $93.49.3 Consequently, three major, unforeseen factors have prevented an uncontrolled rise or spike in oil prices.

  • First, the continued expansion of US liquids production from unconventional reservoirs has increased daily production over the last three years by 1 million barrels a day.4
  • Second, oil demand in OEDC countries year-on-year since 2008 has steadily declined with one exception̶ North America’s demand rose in 2010 before continuing its decline
  • Third, the Chinese economy, which seems to have an insatiable appetite for energy, is showing signs of slowing. China GDP growth rates for 2011-2013 have dropped from over 10% to 7.6% 6

These three factors alone have offset oil production declines because of political turmoil in other parts of the world.image004 Whenever oil prices go either up or down, it is good for somebody…bad for others. In the case of falling prices, it is good for the consumers and bad for both oil companies and oil producing countries. As of this writing, prices are in decline. Will other unforeseen consequences protect the industry from further price declines? Late last year and earlier this year OPEC instituted modest reductions in production (see green line on graph) to about 30 million b/d. The question now is whether it will drop the production further or allow export-minded Russia and the US unconventional producers to do a little “sweating” as Mr. Rockefeller used to say. Stay tuned.

[1] EIA [2] BP Statistical Review 2013, EIA [3] Inflation Data.com [4] BP Statistical Review 2013 [5] BP Energy Outlook 2013 [6] Forbes 8/11/2013; WSJ 7/13/2012

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