Oil-Iraq

The price inelasticity of oil really underscores our addiction to the black gold. Practically every good or service which is made or provided, then transported to the market results in the consumption of oil, albeit directly or indirectly. So it is no surprise then that we are all interested to track its price.  Indeed, there are a number of factors that can influence oil prices.  The obvious ones being; demand and supply, the latter being affected by the Organization of the Petroleum Exporting Countries (OPEC) quotas and the former being influenced by variations in the level of global economic activity. A hash winter in the northern hemisphere normally results in a sharp spike in oil and gas demand.   Natural disasters can also influence oil prices, the Atlantic Hurricane season is keenly monitored by oil traders, and a severe hurricane season forecast could mean a disruption to oil pipeline supplies in the Mexican Gulf, resulting in a corresponding spike in oil prices. 

But it’s the geopolitical situation in Iraq, which could have a potentially limiting effect on supplies and oil prices, that is now moving on oil trader’s radar.  The current crisis in Iraq has caused oil prices to reach a nine month high at 107 USD a barrel (June 13).  Oil markets are on edge as escalating concerns over the prospects of oil supplies from OPEC’s second largest oil producer, Iraq, could be jeopardized.  Without doubt the current situation in Iraq remains fluid. In recent days Sunni militants have gained control of several major cities and in a move to hold back their advance the White House is currently mulling over possible air strikes, having already ruled out the use of ground forces.

Oil consumers have been more dependent on Iraqi’s increasing oil production over the last few years, this being particularly the case as Libya continues to struggle to come back online amid the continuing violence and persistent political turmoil. Iraqi oil production reached 3.6 million barrels a day in February, its highest level in more than 30 years but since then production has slipped back to 3.3 million barrels a day last month, according to oil analysts.  The Iraqi government’s intention was to raise production to 4 million barrels a day by the end of 2014 with further planned increases to oil production reaching 7 million barrels a day by 2016, cited economists at Capital Economics.

So the current political turmoil in Iraq is spooking the financial markets. Put simply, a sustained surge in oil prices would be extremely unwelcomed for the global economy which is struggling to build momentum. “Although the situation is some distance from the oil fields, the reality is that a $20 a barrel spike in crude prices could well prove sufficient to derail the global economic recovery. Ultimately with markets so toppy and repeatedly looking for a reason to sell, this could all make a lot of sense,” said Joao Monteiro, an analyst at Valutrades in London.

Moreover, given Iraq’s significant contribution to OPEC’s output a major disruption to its oil production could also result in a major spike in oil prices, according to analysts. A primary fear in the oil market is that the fighting will spread to Iraq’s main oil-producing areas in the south. However, Iraq’s biggest refinery at Baiji in the north remains under government control, said Iraqi oil minister, Abdul Kareem Luaibi, in a Reuters report on 12 June. Iraqi crude exports from its terminal at Basra were running at an average of 2.6 million to 2.7 million barrels a day on Wednesday, according to Luaibi. So despite Northern oil fields being taken the crisis to date hasn’t had a real impact on Iraqi oil output because these oilfields were already sabotaged, claims Phil Flynn, senior market analyst at Price Futures Group

Nevertheless, the Iraqi crisis brings into focus our vulnerability of depending too heavily on Middle Eastern oil, which happens to be a hot spot for political turmoil, and the need to reduce our dependency on it.  Moreover, it gives impetus for the development of alternative energy sources, with particular emphasis on renewable energies.

Maybe biofuels, a liquid fuel derived from plant waste and animal matter, might be the solution. Bioethanol is used as a replacement for gasoline and biodiesel is used as a replacement for diesel. Biofuels could really give consumers a practical choice, which is something they don’t have right now.  But allocating vast amounts of food crops away from the mouths of people and converting it instead to biofuels could create another problem. The UN Food and agricultural associate have dubbed biofuels as “a crime against humanity.” Moreover, the food inflation that biofuels could cause may have been behind the previous political turmoil in the Arab spring uprisings of 2011.  Recent political unrest and riots are almost always concentrated when food prices are at their peak, according to a recent study by Dr. Yaneer Bar-Yam.

So what about solar power as an alternative means of powering our vehicles to do the weekly grocery shopping? Enter Ford’s C-max energy concept car, which is a prototype solar powered hybrid car. The vehicle has a solar panel system on the roof which tracks the position of the sun. The company said it can draw power equal to a four-hour battery charge. When the car is fully charged it could travel for up to 21 miles powered just on electricity. Ford research shows that in future the sun could power up to 75% of all trips made by an average user in a solar hybrid vehicle.  A recent trial was conducted in North Carolina, which is similar to London in terms of daily sunlight. The magnified solar panels located inconspicuously on the vehicle’s roof needs only 6 -7 hours of sunlight to be able to charge the vehicle.  Ford is currently assessing whether mass production of such a vehicle would be feasible. However, “while solar power could be used to run ancillaries, such as air-conditioning, the limited capability for solar panels means that we won't see them used as the main power source anytime soon," said Damion Smy  from Car Magazine.

It seems that our dependency on oil is here to stay, albeit in the medium short term. There’s always pedal power.