Study notes geopolitical role in oil prices

Geopolitical worries are keeping prices of crude oil higher than market forces indicate they should be, according to a study published by Chatham House, London.

Here are key summary points of the study by Chatham House Senior Research Analyst Paul Stevens and Mathew Hulbert, an energy security specialist at European Energy Review:

• 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%, driven by geopolitical concerns.

• The future price trajectory depends on politicians. Failure to manage the Euro-zone 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 large increase in prices needed by producers to manage their fiscal positions. 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 the Organization of Petroleum Exporting Countries. 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,” the analysts said.

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