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Chatham House joins chorus on policy dangers in oil market

October 16, 2012

Last week, I wrote about two different reports that have emerged this month, each examing the changing nature of petroleum geopolitics from slightly different perspectives.  The IEA published their Medium Term Oil Outlook and found that the rapidly growing production in North America was the single biggest change to the oil world in at least a decade, and was transforming 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, individually, would pinch supply on the one hand (war with Iran) or crush demand on the other (austerity driven economic slowdown), and all this happening during that same North American production boom.

A new report from Chatham House (link opens pdf file) dovetails with the two previous efforts, and largely concurs with Clayton’s analysis.  From the summary:

  • The oil market currently suffers serious contradictions. In terms of supply and demand, it is possibly oversupplied. This is not least because higher prices to final consumers are beginning to bite.
  • At the same time prices since June 2012 have increased by around 30 per cent, driven by geopolitical concerns.The future price trajectory depends upon politicians. Failure to manage the eurozone crisis could lead to much lower oil prices while an Israeli attack on Iran would cause a major price spike.
  • A key outcome of the Arab uprisings has been a significant increase in the prices needed by the producers to manage their fiscal position. This is a serious indictment of producers’ failure to diversify their economies away from dependence on oil revenues over the last 20 years.
  • If the oil price goes much lower, three scenarios could ensue sequentially: a price war forcing prices even lower, a period of internal repression as revenues fail to buy compliance among populations, and internal unrest among producers, which could lead to supply disruption followed by prices bouncing back.
  • Underlying all this is a fundamental dilemma for OPEC. Its members need higher prices, but these will cause demand to fall and other supplies, including unconventional resources, to increase. This will force prices lower. Thus OPEC members need the golden eggs at a rate that may well kill the goose that lays them.
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