Brent spooked by political uncertainty

Nothing is truer of economy than its attachment to politics and nothing is more telling of said attachment than the fluctuations of the Brent crude oil prices in times of political instability. It is a known fact that oil and gas is a risky industry, prices are never stable, the market is burdened by uncertainties and there are always unexpected rises and falls in prices, but is there a way to predict a certain fluctuation?
Amid tensions in the Middle East, specifically during the last Israel-Lebanon war, crude oil prices were unstably floating in the range of $77 a barrel, scoring an increase of 16.9%. To be more precise, on July 14th, the day of the Israeli attack on Lebanon, oil prices counted $78.4. During that time, traders expected that in the near future, the prices would jump even higher and reach $100 a barrel. In August, however, the price started to decline due to the end of the summer and the lessening anxiety about a destroyable hurricane season. Then, unexpectedly, oil prices dropped at the beginning of October to less than $60, in one of the largest price falls during the past 15 years. While this was undoubtedly good news to the economy at large, this sudden fall produced some losers as well; shareholders and investors expecting to make a fortune or quick profits through price betting, lost quite a bit. The reasons for the sudden rise and fall in oil prices can be attributed to many factors. Chief among them, of course, is politics.
The instability and tensions dominating the Middle East, such as the Iraq war and as previously mentioned the Israel-Lebanon war, have caused a scare on several levels. In terms of consumption, consumers are more viable to expend in order to store when there is political anxiety. In terms of investment, investors are more likely to not invest in times of political instability in fear of losing their concessions based on national whims; for instance, in Latin America, where Bolivia and Ecuador have nationalized oil firms.
When the Brent price is not affected by politics, then it is moved by natural necessity; under this broad term of natural necessity is the rising demand of fast growing countries such as China and India. The demand of these immensely populous nations might not be met by the current oil production. It has been estimated that the world oil demand is to increase by 1.38 million barrels per day or 1.66% to 84.6mb/d in 2006. The situation of instability whether caused by war or internal violence does not solely decrease oil production, but more destructively, at times it causes long-term damage to the infrastructure of oil installations. A prime example of this can be found in Nigeria, where rebels continuously attacked oil installations and workers in the Niger River delta. These attacks brought to the country a loss of 800,000 barrels from its daily production.
This brings us back to the idea of predicting price fluctuations, and whether such a feat is possible. With the end of the Israel/Lebanon war emerged the fear that Iran would be the next in line for besiegement. Many of those working in energy markets interpreted the war between Israel and Hezbullah as a proxy war between Iran, the second largest oil distributor in the world and the US.
The US threat imposed on Iran to ban its nuclear program project has brought about a certain apprehension regarding oil. The concern revolves around the possibility of Iran closing the Hormuz Strait. This strait allows for more than 17 million barrels of oil to pass daily and so the likelihood of it ceasing its operations means a global distortion in oil production and thus prices. In fact, such a decision would result in taking prices to an all time high.
Apart from the Iranian project of uranium enrichment and the possibility of US military interference, some analysts raised another point highlighting the covered reasons for this critical situation: the Iranian Oil Bourse. This is one of Iran’s plans to becoming the dominant center of oil trade in the Middle East region.
The IOB causes much anxiety for the American administration for several reasons. Among them is the fear that Iran will be in control of oil exports in one of the largest oil distributor regions, and more importantly, the possible risk facing the US economy if Iran decides to switch the oil exchange trade currency from US Dollars to Euros. Regardless of Iran’s true capabilities to apply this strategy, such a shift, experts say, could straightforwardly lead to a massive crash in the American currency’s value.
Confirming rumors concerning the switch of oil trade currency, Iran’s Deputy Oil Minister and director of the IOB program, Mohammad Javad Assemipour, said “Iran’s oil exchange with the region’s countries and also some of the East Asia states will take place in Euros instead of US Dollars.” This undoubtedly came as worrying news to many military experts, including William Clark, an American security expert who predicted that “if Iran threatened the hegemony of the US Dollar in the international oil market, the White House would immediately order a military attack against it.”
For others, however, this news was welcomed. Major oil producing countries, such as Venezuela and oil consuming countries, such as China and India, have openly proclaimed their support for the coming IOB. These countries’ support will indisputably cause a rift in relations with the US, which will cause what some will see as a much needed balance of power in the international realm and others will see a rerun of the much loathed cold war, but with the blocks played by several entities and not just two overwhelming forces. Apparently politics and not just beauty is in the eye of the beholder.
Hence, can oil price fluctuations be predicted? To a certain extent, yes.  Political instability will more often than not create price fluctuations. With this information in mind, the answer to maintaining stable oil prices is peace, but that is a bit capricious and all-together naïve, thus one must realize other problems that can have practical and applicable solutions.
With the above galvanizing remarks in mind it must be noted that the key challenge in the energy market is to figure out how to balance supply and demand in the oil market, in order to maintain a reasonable range of oil prices.
The Gulf Cooperation Council, OPEC, and other oil organizations need to develop better investments in oil refineries, which will hopefully decrease oil prices. Upgrades to infrastructure, which are crucially needed to improve the capacity of oil production, have been insufficient causing poor profitability. As a result, this has hindered the refineries’ capacity to produce enough gasoline, which has seriously affected crude oil prices. Thus the message to oil players is: if you cannot bring about world peace than at least improve on what you can.


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