Oil and Turmoil in the Middle East

By+Mei+Xinyu

Whereas most primary commodities have dropped drastically in price， crude oil remains as much as $100 per barrel. It is in effect a result of manipulative actions and is unlikely to be sustained over the long term.

The Organization of Petroleum Exporting Countries （OPEC） has been driving the high oil prices through manipulative behaviors such as limiting oil production quotas. With the current pricing mechanism， oil is only partially affected by the relationship of supply and demand. Despite the regime change in Egypt and factional conflicts over Libyan oil fields， instability in the worlds most oilrich region has little to do with todays high energy prices.

Market factors

Supply-demand dynamics and changes in monetary policies have weakened the foundation of oil price spikes. Moreover， the shortage of global oil market supplies has been greatly alleviated since 2012 due to several factors.

Global economic growth on the whole has slowed down， leading to reduced de- mand for oil. In particular， the growth of emerging economies—which account for a significant proportion of energy consumption—has decelerated remarkably， including China. In the previous 10 years， speculators frequently argued that Chinese demand was the strongest source of rising oil prices.

Reforming the nature of energy subsidies will further weaken demand for oil. In recent years， energy consumption growth in many countries has been based on unreasonably high energy subsidies， especially in emerging economies. These policies come with heavy burdens on the financial health of these countries. The International Monetary Fund （IMF） estimated in its report， Energy Subsidy Reform： Lessons and Implications， in 2013 that global energy subsidies totaled$1.9 trillion， accounting for 8 percent of all government revenues. Under such circumstances， due to slowing economic growth and mounting financial pressures， many countries will take measures to reduce or cancel energy subsidies， thereby weakening energy demands.

The unrelenting high oil price promotes the development of alternative energy resources including natural gas， nuclear energy， hydroelectricity， solar and wind energy. For example， although Chinas oil consumption has increased in the last decade， its proportion of all energy consumption reduced from 22.2 percent in 2000 to 18 percent last year.

High prices have led to large-scale invest- ment in oil exploitation in new areas， such as Sub-Saharan Africa， North America and Latin America. Particularly， innovations in shale oil and gas usage by the United States have brought a revolutionary impact on the energy industry. There is now a strong possibility that increased oil production could drive down the price of oil.endprint

Changes in major economiesmonetary policies have also affected oil prices drastically. Quantitative easing by the United States previously offered robust support for rising oil prices. However， the Federal Reserve may reduce or cancel the policy， which could lead to a bear market in primary commodities—including oil.

Federal Reserve leaders have predicted that they will not raise interest rates by mid-2015， suggesting the like-lihood of a hike in interest rates after that time frame. Primary commodity markets will then suffer another blow.

Geopolitical upheaval

Geopolitical instability—formerly a frequent scapegoat for oil price spikes—has rattled the international oil market this year but only marginally affected prices. Some of the Gulf oil-exporting countries， such as Saudi Arabia， are major sponsors for the militant group Islamic State of Iraq and Al-Sham （ISIS）. To some extent， supporting turmoil has become a profitable investment. These countries can profit from higher oil prices by funding extremists that cause chaos in the Middle East. However， it is unproven whether regional upheaval alone can push up the price of oil.

Ukraine and Syria are not major oil exporting countries. Even in Iraq—the second largest OPEC country—ISIS is unlikely to further drive up the price of oil. Indeed， Iraqs oil reserve ranks fifth in the world. The International Energy Agency estimates that Iraq alone can provide as much as 60 percent of OPECs newly increased oil supply by 2019. Thus， the market panic that ensued when ISIS occupied north Iraq made sense at the time.

However， ISISs impact has been overestimated.

Around three quarters of the nations oil fields are located in Shiite-controlled south Iraq—far from the danger posed by ISIS. Most of the remaining oil， produced in Kirkuk， is controlled by Kurds in the north. These oil fields are not easy targets for the Sunni militant group. The ISIS occupation of Iraqs largest oil refinery plant has limited influence on the oil supply and export， as crude oil produced in south Iraq is largely exported to refinery plants overseas rather than the ISIS-controlled plant. According to oil shipment statistics and industry information， oil exports of south Iraq had surged to record highs in June when ISIS swept the countrys north and shocked the world.

Despite the brutal slaughter of a large number of captives and civilians， ISIS is a well-organized group whose goal to establish a legitimate nation demands sound financial footing and an administrative system on par with multinational enterprises. ISIS wants to expand its territory， but their ability to do so is questionable. The militants have declared a caliphate but are not interested in reducing or cutting off crude oil production and export. Rather， they hope to seize more wealth.endprint

ISIS leaders are well aware of the importance of sustainable revenue. By robbing a bank， ISIS can acquire a windfall， but it is not sustainable. Regionally， oil production and export is the biggest and most stable source of revenue. For this reason， ISIS encouraged oil production after occupying some oil fields in Syria， and then sold the oil on the black market for profits.

Even amidst the upheaval and uncertainty， all sides of the ongoing conflicts in the Middle East are disregarding OPEC quotas in a race to produce more oil and thus increase revenues. No matter who controls the oil field—the Kurds or ISIS—both have a strong motivation to increase oil production and export.

ISIS militants， though they have not seized pipelines， are capable of smuggling oil products. Iraq was under strict sanctions from the United Nations after the first Gulf War in 1991. Even so， the Saddam Hussein regime still managed to smuggle 200，000 to 300，000 barrels to overseas market every day during that period.

Today， militants have much greater opportunities to smuggle oil from Iraq. The latest reports have shown that oil smuggling has become more rampant since ISIS seized oil fields in Syria and north Iraq.

The geopolitical shift in the Middle East， while a source of upheaval to the lives of those in the region， is not expected to have the same disruptive effect on the price of oil.endprint