Middle East Civil Unrest and Oil Prices

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    Feb 22, 2011

    Q1: How have increased political tensions and antigovernment demonstrations in the Middle East and North Africa affected global oil supplies?

    A1: Just as concern over closure of the Suez Canal and Sumed pipeline as a result of popular uprisings in Egypt had begun to subside, the expansion of antigovernment demonstrations and civil unrest to Libya, Algeria, Bahrain, Yemen, Iran, and Jordan have resurrected fears of oil supply disruptions and higher oil prices. Over the weekend, Bahrain’s military forces withdrew from Pearl Square, ceding the area to protesters and signaling (at least for now) a willingness to avoid further bloodshed and confrontation and begin a dialogue with opposition leaders. In Libya, as protests have spread from Bengazi to Tripoli, a defiant Colonel Mu’ammar Qadhafi has attempted to quell the crowds by using helicopters and military aircraft to fire on demonstrators, prompting senior diplomats and government officials to resign and increasing calls for him to step down. In Yemen, President Ali Abdullah Saleh’s attempts to mollify protesters by agreeing to concessions, including not standing for reelection, have thus far not satisfied demonstrators, and protests are continuing. And at this writing, two Iranian naval vessels are transiting the Suez Canal to join maneuvers off the coast of Syria.

    Collectively, these countries represent 10 percent of global oil output and roughly another 10 percent of worldwide refining capacity. More importantly, however, they abut other major producers, including Saudi Arabia, Iraq, and Kuwait, serve as home to key regional U.S. military bases, and are proximate to major oil transit “choke points” (the Suez Canal, Bab el-Mandeb, and the Strait of Hormuz) through which a significant portion of global oil moves to international markets. The Middle East currently produces 30 percent of the world’s crude oil supplies, and when combined with North African producers, the region accounts for over a third of the world’s oil supply.

    While to date, the demonstrations have not significantly affected production output—nor major transit routes—continued unrest is beginning to have an impact. Some company officials in Libya are mobilizing to remove nonessential personnel, strikes threaten to shut or slow down facilities and operations, and a government announcement of force majeure on export contracts has been reported. As a consequence, oil prices and perceptions of heightened geopolitical risk to key producers are on the rise.

    Q2: If supplies have so far been unaffected, why have Brent prices been rising?

    A2: For a variety of reasons related to production volumes, product demand and yields, affiliation with a stable currency, and financial support, Brent serves as a major international “marker” crude. Over the course of the past few weeks, Brent prices have been rising, recently exceeding $100/barrel. Reacting to the weekend reports, prices jumped yesterday to over $105/barrel. There are a variety of reasons for this surge. Colder weather and distillate/diesel demand increases in Europe and elsewhere have combined to make processing of Brent a favorite. Concern over closure of the Suez Canal during Egypt’s demonstrations accentuated that preference as refiners became concerned about receiving Middle East crude and product shipments through the Red Sea. The continuation and spread of civil unrest, bloody confrontations between demonstrators and government forces, and political tensions have undoubtedly added a sizeable (at least near-term) “risk” premium.

    That said, global spare oil production capacity, as well as spare refining capacity, and healthy worldwide inventories are more than adequate to offset a limited loss of production capability (note: this becomes more problematic if the aggregate impact of disruptions to several small to mid-size producers becomes larger still). It also assumes that the current popular unrest does not spread to nations that are more prolific producers (e.g., Saudi Arabia) or otherwise impact their production or shipping capabilities as a consequence of either work stoppages or sabotage.

    Frank Verrastro is senior vice president and director of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. David Pumphrey is deputy director and senior fellow with the CSIS Energy and National Security Program. Alan Hegburg is a senior fellow with the CSIS Energy and National Security Program.

    Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

    © 2011 by the Center for Strategic and International Studies. All rights reserved.

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Frank A. Verrastro