Record oil price gap signals growing fears over energy security. Energy Analysis by Mary E. Stonaker


Failure of peace talks in Libya and predicted long-term regional instability have prompted the US to rearrange its energy portfolio and exposed European vulnerabilities.

Record gaps in crude oil benchmark prices, nearly $23 difference at its peak, marked American shifts away from Middle Eastern oil, amongst other things.

West Texas Intermediate (WTI) crude oil is traded in the New York Mercantile Exchange (NYSE: CRUD) and looked to as the standard American trading benchmark.

Brent crude oil is traded on the electronic Intercontinental Exchange (ICE) as ICE Brent Crude futures contracts and used as the standard benchmark for the majority of world.

Usually, the two oil trade within a dollar or two of each other with lighter, sweeter WTI crude at the higher premium.

Lower American prices can be attributed to surplus American supply from two newly opened Canadian supply pipelines combined with continued feedstock flowing north from the Gulf coast into mid-western refineries. Increased supply drives down prices, which are reflected in the traded prices of WTI. At least for the meantime, American energy security is not feeling the strain on weakened supply routes as much as Europeans.

Sky-rocketing Brent prices reflect not only the insecurity of European oil supply from North Africa but also the ever-increasing Asian demand competing with European consumers.

In 2010, demand topped 27 million barrels per day (mbpd) in Asia; nearly 24 mbpd in North America; and 14.43 mbpd in Europe. Growing populations across Asia, but especially in India and China, provide mounting energy demand.

Crisis in Libya has removed approximately 1.3 million barrels per day (mbpd) from the world marketplace. Its major oil trading partners before mass protests led to violent clashes between Muammar Qaddafi’s forces and Libyan citizens were China, Italy, Spain, and Germany. While Saudi Arabia has pledged to supplement this gap in the market, investor uncertainties will prolong record high prices.

Whether or not investor fears are founded will determine the length and extent of the pressure on pricing.

While Americans are currently facing a supply surplus, lowered prices will eventually drive up demand causing the price of WTI crude oil to stabilize.

However, the stability and ceiling on Brent crude oil is much less assured in Europe and Asia – a cycle which may be near impossible to break given the continuing geopolitical stressors.

Oil markets are effected by future geopolitical forecasting such as the following.

Yemen has descended into perpetual unrest, reverting to tribal allegiances and alliances after the recent departure of President Ali Abdullah Saleh, casting uncertainties on the security of vital strategic sea lanes (Red Sea and Suez Canal) through which 7.5 percent of the world’s total traded products flow each day. The unpredictability of this crisis stokes investor fears despite the fact that Yemen contributes little if any oil to the global market.

Fears over the safety and security of ships in the Red Sea are not new.

Increasing pirate-based attacks over the past few years has also had its affect on world markets. However, when combined with instability in Sudan as it faces violent clashes ahead of planned secession of the South, fragile rebuilding in Egypt including the seemingly lawless Sinai Peninsula, and unrest in Yemen could further proliferate and compound such fears in international markets.

Inter-OPEC quarreling contributes to the fears of instability as they failed to reach an agreement to increase production quotas to drive down international prices. OPEC has long maintained a united front. While Iranians and its supporters wish to maintain high oil prices, Saudi Arabia plans to increase production to keep prices low. Low prices will prevent nations from seeking petroleum alternatives at a faster rate.

Further decreasing supply, Shell Companies in Nigeria announced their inability to meet contractual production volumes due to frequent oil theft, and subsequent pipeline leaks and fires. Rebel groups operate a lucrative black market in Nigeria selling this stolen oil. This will no doubt have ripple effects.

The ongoing conflict in Libya, where a NATO strike inadvertently hit a civilian village earlier this week, has no end in sight. NATO and the Allied Forces are divided over the involvement and levels of involvement. The flawed NATO strike has drummed up anti-Western sentiments within the struck region, imploring Colonel Qaddafi to negotiate with Libyan citizens, and calling for the end of NATO strikes.

The uncertainty surrounding the geopolitical future of African and Middle Eastern nations including the current status of oil fields and transportation equipment within concerned nations will no doubt continue to exert upward pressure on the price of Brent crude oil, the global benchmark in oil trading.

The true question is, how long will the upward pressure last?

(Mary E. Stonaker is an independent scholar, most recently with the Middle East Institute, National University of Singapore. She can be contacted at [email protected])