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Policy incoherence roils the world oil markets

October 10, 2012

Blake Clayton at Foreign Policy explains why competing policy decisions in Washington, Brussels and Beijing are co-equal contributors with Middle East unrest to a chaotic oil market.  The oil market is navigating a path between the Scylla of supply disruptions and the Charybdis of a collapse in economic growth.

Ask the leaders of OPEC what it’s like to control the world oil market right now and they would probably laugh at your premise. Today’s market jitters are largely beyond their control. The U.S. Federal Reserve’s new open-ended commitment to expanding its balance sheet will likely push up the price of real assets like oil, even as White House chatter about dipping into the Strategic Petroleum Reserve (SPR) keeps the markets guessing about a sudden price collapse. At the same time, U.S. and European Union sanctions on Iran have crippled its oil exports, contributing to soaring oil prices and sparking demonstrations in downtown Tehran over the plunging value of the rial.

The potential for oil prices to shoot sharply higher or lower in the coming months due to events far outside OPEC’s control is real, though still improbable. An Israeli military strike against Iran has the potential to drive oil prices skyward, just as the spread of Europe’s debt crisis could cause oil markets to collapse. Add to this mix the threat of a so-called hard landing for China’s economy or Washington falling over the fiscal cliff, either of which could send oil prices sharply lower. Yes, unrest in the Middle East is a continuous threat to stable oil prices, but political decision-making in the West and China is injecting more than its fair share of uncertainty into the market.

Chart: The influence of geopolitical events on oil spot prices

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One comment

  1. […] the world market.   Writing at Foreign Policy, Blake Clayton examined the same situation and identified “policy incoherence” as a key factor in global energy geopolitics – the collision course of various policies that, […]



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