The Geopolitical Threat to the World's Oil Industry
Despite a recent upturn, oil prices remain nearly 50% below their peak levels reached in the middle of last year. This has led to a major shake-up of the global oil and gas industry, with high-cost and high-risk oil producers recording a major decline in investment levels as a result of this fall in oil prices. Given the fact that oil production in North America is forecast to continue to rise in the coming years and that Saudi Arabia and some other key Middle Eastern oil producers refuse to reduce their production levels, many experts believe the lower oil prices are here to stay for the next few years. However, one factor that could drive up oil prices to new highs stubbornly remains in place, the threat of political instability in some of the world’s leading oil producing centers.
Despite the sharp rise in North American oil production, the Middle East and North Africa remains the heart of the global oil industry thanks to its abundant reserves and the low cost associated with exploiting most of these reserves. So far, the spread of instability in this region has avoided most of its leading oil producing centers. However, it is a worrying sign that oil production in major producing countries such as Iraq and Libya is being impacted by civil wars in those countries. Moreover, the threat of unrest in Shiite-populated eastern Saudi Arabia (the heart of the Saudi oil industry) is a serious risk in the wake of the bombing of a mosque in that region by militants linked to the Islamic State. Furthermore, tensions between Iran and most Gulf States are on the rise and this could lead to severe disruptions to oil production in the Gulf or to a blockage of the vital Strait of Hormuz. Any such disruption in this region will inevitably lead to a major increase in oil prices.
The Middle East is not the only region in which political instability could threaten global oil supplies. Russia’s vast oil and gas industry has been used as a political tool by the Kremlin to pressure and intimidate many European countries that remain dependent on Russian energy supplies, most notably Ukraine. Meanwhile, Latin America’s expanding oil industry is being jeopardized by the disgraceful mismanagement of Venezuela’s oil industry by that country’s government and by the worsening corruption scandal at Brazil’s state-owned oil company, Petrobras. Finally, Sub-Saharan Africa’s rapidly-expanding oil and gas industry is exposed to severe political and security risks in many of its leading oil production locations, most notably Nigeria, where the threat of instability in the Niger Delta could lead to a sharp decline in that country’s oil output.
Looking ahead, political stability, or the lack of it, will play a massive role in the direction of the price of oil in the coming years. If the current unrest on the Middle East and North Africa spreads to the region’s main oil producing countries, then the price of oil will soar. Likewise, if oil demand rises at a faster pace than in previous years, and if disruptions in oil output occur in more marginal oil producing countries, markets could become increasingly concerned about oil supplies, leading to a more gradual rise in oil prices. On the other side, if a relatively high degree of stability can be maintained in the world’s leading oil producing centers, and if oil output rises as expected in North America, Sub-Saharan Africa and other regions, then we could be in line for a prolonged period of relatively low oil prices. What is certain is that politics and security will play a massive role in determining oil prices for the foreseeable future.