Why is oil so important to the global economy? Has its
importance gotten greater or lessened over time?
Undoubtedly, there has been huge progress in lessening the
world’s dependence on oil as a commodity, from energy-saving innovations to the
fracking revolutions. But the fact is that global demand for energy keeps on
rising at a greater pace as the populations achieve higher standards of living.
For example how many Chinese drove cars a decade ago? Now it’s the world’s
biggest auto market.
In Libya the ongoing skirmishes between the government and
rebel group have reduced the daily production of crude oil dramatically from
1.6 million bpd to an estimated below 200,000 bpd. In Iraq there has been an upsurge
in conflicts between various militias which has interrupted production. In
Nigeria, production has fallen due to leaks caused by the trouble makers.
Moreover, Syria is in chaos and Egypt is still unstable.
The Oil price has a record of plunging the globe into
recession. Kirk Spano, the founder of Bluemound Asset Management, assessed that
the spiking oil prices in 1973, 1980, 1991, 2001 and 2007 contributed to a
greater or lesser degree to the economic recessions of 1973-74, 1980-81,
1991-92, 2001-03 and 2007-08 that were painful for all equity investors. The
global financial crisis of 2008 was no different with a sudden spike in oil
prices to $147 a barrel that broke the back of several economies.
It’s a problem when a country like Japan which is
technically advanced has to shut down its nuclear stations post the earthquake
or when a country which does not fall in the fault line, Germany, has to do the
same post the public vote on the matter. Oil is abundant, safe and easily
consumed at a price.
Are we not sensing a déjà vu this summer?
Iraq plays an important role for market stability. With
current production of 3.3 mbpd Iraq is the second largest producer in the OPEC
cartel and it has the potential to become larger player. Current predictions by
the International Energy Agency (IEA) show Iraqi production growing to 4.4mbpd
in 2015 and to nearly 6mbpd by 2020.
An eventual decline in Iraqi exports would mount pressure on
energy hungry economies of China and India to increase their imports of Iranian
oil. Russian oil exports would become crucial for global markets, potentially
further strengthening the former Soviet Union’s position in Ukraine. Finally, a
major spike in oil prices would help regimes like Venezuela too. If Iraq falls,
oil prices would shoot up breaking previous highs and spread unrest in the
region.
