By Dr. George Kiourktsoglou.
The umbilical cord that connects the notoriously inelastic global crude oil markets to geopolitics is beyond any reasonable doubt. All-out wars, ‘colour revolutions’, insurgencies, even minor military confrontations can easily usher into an era of uncertainty and as such, of price volatility.
Much of the world’s crude oil is located in politically unstable (to say the least…) regions.
Who will ever be able to forget the impact of the Arab Oil Embargo on the oil markets and the price gyrations that promptly followed it (see Chart I)? More recently, disruptions to supply (or curbs on potential development of resources) attributed to political events have been observed in Nigeria, Venezuela, Iraq, Iran, and Libya.
If the history of this ‘tough love’ repeated itself, one would expect the recent ISIS developments in the broader Middle East to drive crude oil prices off charts and through the roof… Luckily, this has not been the case (see Chart II). There is no question that history-wise this ‘decoupling’ of crude oil prices and geopolitics feels counter-intuitive. It can be attributed neither to nose-diving demand, nor to a supply-glut…
Chart II: The Economist, http://goo.gl/242Sce
Then, what is it about…?
The term disruptive innovation was first coined by Clayton M. Christensen of Harvard’s business school. It stands for any innovation that helps create a new market, which eventually disrupts the existing status quo, rendering everything in it uncompetitive, obsolete and eventually irrelevant. In the case of global oil markets, disruptive innovation came along in the form of ‘tight oil, or ‘shale oil’, or more simply, hydrocarbons extracted using ‘fracking’.
America’s output of shale oil has risen by around 4mil. barrels a day since 2008, cutting American imports from OPEC almost by half. Thankfully, China and Japan promptly stepped in to fill the gap of demand. However, they did it at lower prices… a fact that drove crude oil to hover currently around $80/barrel.
Food for Thought
One should remember that predictions based on past events may prove utterly wrong.
Because history does not always repeat itself… even as a farce…!
