The world has entered a zone of maximum upheaval. From the Atlas Mountains of North Africa to the Hindu Kush, in Afghanistan, the Middle East is in flames. The destruction of a Malaysian airline over Ukraine, almost certainly shot down by Russian-backed separatist rebels, threatens war in the Black Sea region. Libya is being torn apart by competing militias, while parts of Iraq are under assault by the murderous Islamist force known as ISIS. Syria remains a bloody horror show, and Israeli troops have launched a ground invasion of Gaza. At no time since the terror attacks of 2001 has the world seen such conflict and instability.
So why aren’t oil prices higher?
Prices spiked briefly after the news on July 17 that Malaysian Air flight 17, en route from Amsterdam to Kuala Lumpur, was shot down by a surface-to-air missile fired from eastern Ukraine. U.S. oil futures rose $1.99 a barrel, up 2% on the New York Mercantile Exchange, to reach nearly $104. That was the largest one-day jump since June 12, when ISIS launched its offensive in Iraq, according to The Wall Street Journal. But markets quickly calmed: the next day, benchmark crude had retreated below $103 a barrel on the NYME. The shocks of recent days had caused a tremor across world petroleum markets, not a tsunami.
No Lost Sleep
“At any given point of time, global financial markets are always at risk from geopolitical disturbances, but this time around nobody’s losing sleep over it,” wrote Malini Bhupta in the Business Standard, India’s leading economic newspaper, in a column headlined “Markets shrug off geopolitical risks as oil prices remain stable.”
Before the latest outrage in Ukraine, oil prices had actually been easing: in mid-July U.S. crude fell below $100 a barrel for the first time since May. That’s not to say that prices aren’t high; as Steve LeVine, of Quartz, points out, geopolitical disturbances have removed around 3.5 million barrels of oil a day from world markets since last fall, and if the world were a more stable and peaceful place, oil prices would likely be well below $100 a barrel. But given the current unrest, a price per barrel of $125, or higher, would not be startling.
The ability of the market to absorb multiple shocks and keep prices relatively stable is an indication of structural changes that have taken place in recent years.
Awash in Conflict, and Oil
According to Liam Denning, writing in The Wall Street Journal’s “Heard on the Street” column, the “forward curve” – the price of oil scheduled for delivery months or years in the future, based on the trade in futures contracts – has flipped in recent weeks, meaning that prices for contracts nearer in time are now lower than those further out. When the curve slopes upward like that, it’s an indication that supplies are plentiful. “The global oil market no longer looks quite so panicked about Iraq,” commented Denning.
More broadly, the world’s supply of oil has been climbing for years, and continues to do so despite the current crises. What’s more, the sources of that supply have diversified; the Middle East no longer has as a dominant role in world production as it did 10 or even 5 years ago.
Defying “peak oil” predictions, world crude production increased roughly 50% over the last 30 years, rising from about 50 million barrels a day in 1983 to 76 million in 2012. Regions that were negligible producers before the turn of the century are now significant oil suppliers: Africa’s production has doubled since 1983, as has South America’s. Despite the current civil war, oil production in Iraq has soared, growing from about 300,000 barrels a day in 1991 to 3 million in 2012. Driven by new drilling in the tar sands, Canada has more than doubled its production in the last 20 years.
And then, of course, there’s the United States, which in 2011 became a net exporter of petroleum products for the first time since the post-World War II era. In short, the world is awash in petroleum, and barring an all-out war between Putin’s Russia and the West, is likely to remain that way for some time.