This article appears in the latest issue of IEA Energy: The Journal of the International Energy Agency.
21 September 2012
By Antoine Halff
For the oil markets and industry, the Middle East is a perennial flashpoint. Given the region’s critical importance to world energy supply and its reputation for “instability”, news from there moves the market sometimes in knee-jerk fashion. But rarely has so much been going on across so much of the region as in the past two years. And rarely have developments there seemed so pregnant with consequences for energy markets.
Keeping track of it all is enough to make oil analysts feel punch-drunk.
The term “Arab Spring”, that catch-all journalistic shortcut, disregards the vast differences in cultural, demographic and political outlook among the North African and Middle East countries recently caught up in domestic turmoil or international discord. The energy profiles of those countries are just as varied as their populations and political arrangements.
Unrest affects output as well as regimes
Tunisia doesn’t quite rank as an energy heavyweight, yet once calls for greater political participation began there in late 2010, the news gave rise to speculation about “contagion effects” in other countries, including the large oil producers on Tunisia’s borders. As unrest spread to Egypt, markets became concerned about potential tanker traffic disruptions in the Suez Canal. Problems with Egyptian gas exports notwithstanding, those fears proved largely unfounded. But the Libyan civil war did cause a major disruption in oil supply, eventually leading to an IEA stock release.
Political turmoil has since taken a toll on oil production and exports from Yemen and Syria, while conflict between Sudan and the new state of South Sudan cut supply from there. None of those countries is a major producer; in aggregate, though, the disruptions have been substantial. But the potential fallout from the Syrian civil war far exceeds that country’s importance as an oil producer. The outcome could prove game-changing not only for the country itself but for the region as a whole and beyond.
Meanwhile, the tightening of international sanctions on Iran, the third-largest OPEC producer, has had a profound impact not only on Iranian exports but also on oil trade flows more generally. For analysts, this is not just a question of counting how many Iranian barrels the sanctions may in effect have removed from the market – however tricky that accounting exercise may be. The questions are many: which producers are picking up the slack left by the drop in Iranian supply, and where do their increases leave spare output capacity? How are refiners and importers coping with the Iranian shortfall and adjusting for changes in supply sources? What is the effect on the shipping industry? How is Iran adjusting to the sanctions, and how will a reduction in exports and potentially production affect its longer-term production capacity? How does this all look as seen from the oil trading floors, and how are market expectations shaping trading behaviour both in physical crude and product markets and in futures exchanges? And, inevitably, how is it affecting prices?
Amid disruptions, positive developments
Yet for all the concerns about unrest and conflict, it is important to keep in mind that current Middle East oil developments are not all about disruption risks. There are many success stories in Middle East production, and the region has a knack for defying expectations on the upside as well as the downside. Already Iraqi production has reached highs unseen not only since the first Gulf war but since the Iran-Iraq war of the 1980s. Given the size of Iraq’s endowment, the country’s potential to play a pivotal role in global oil supply is considerable. Libyan output has recovered from the 2011 civil war much faster than expected. Developments in Saudi Arabian production entail feats of cutting-edge technology that have helped the kingdom maintain substantial spare production capacity. Saudi Arabia has used that cushion on several occasions, including during the past two years, to make up for supply shortfalls elsewhere, a substantial contribution to global energy security.
Last but not least, the region, long acknowledged as a major production centre, is emerging as a key demand centre in its own right – so much so that fast-growing domestic consumption is threatening to encroach on future export availability. Assessing, analysing and forecasting Middle East oil markets increasingly will entail not just measuring production and reserve levels but
also monitoring regional efforts at fuel efficiency, demand control, de-subsidisation and fuel diversification. In addition it will require efforts by the region’s major producers to capture more of the oil and petrochemical value chain and use oil revenues to sustain a more diversified and balanced model of economic growth.
The International Energy Agency (IEA) produces IEA Energy, but all analysis and views contained in the journal are those of individual authors and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation.
Antoine Halff newly heads the IEA Oil Industry and Markets Division, where he worked as a demand analyst in 2001-05. In between, he was a US Energy Information Administration lead industry economist and an adjunct professor at Columbia University’s School of International and Public Affairs.