Market Hotline: Geopolitical analysis key to oil price direction in 2002

April 15, 2002
Gauging the direction of oil prices requires some attention to-if not expertise in-geopolitics. While that has always been the case, never have the stakes been so high for oil markets as they are today in the Middle East.

Gauging the direction of oil prices requires some attention to-if not expertise in-geopolitics. While that has always been the case, never have the stakes been so high for oil markets as they are today in the Middle East.

There are echoes today of the 1973-74 Arab oil embargo coming in response to Israeli military actions. Today, those calls have been resurrected for Islamic exporters and come from Iran and Iraq to punish those nations that would support Israel.

There are also echoes of the 1990-91 Persian Gulf crisis, with US Vice-President Dick Cheney whistlestopping the Middle East to garner support for a virtually inevitable US-led military campaign to oust Iraqi despot Saddam Hussein.

And there is the bleak sense of perpetual déjà vu that is the worsening Palestinian-Israeli violence. This ugly cauldron of terrorist massacres and reprisals threatens to boil over into a broader intifada that could undermine regimes across the Middle East and thus forever change the landscape of oil markets.

All of the foregoing is reason enough that markets have placed a "war premium" on the price of crude oil. Despite a fragile economic recovery, evidence of still-ample crude and products stocks, and uncertainty over near-term crude oil supply and demand, oil prices nevertheless have zoomed up nearly 40% since yearend 2001.

The questions remain, then: How high will oil prices go this year, and when will the big spikes occur? For answers, look to the entrails-divining and second-guessing of geopolitical analysis.

Changing US policy

The overriding consideration for the direction of oil prices this year is the changing context of US policy towards Iraq, contends Energy Security Analysis Inc., Wakefield, Mass., in its weekly intelligence briefing.

In recent weeks, the Bush administration stumbled in its efforts to garner support in the Middle East for an early bid to oust Saddam for these reasons:

  • The spiraling violence between Israelis and Palestinians, culminating in the Israeli army's attack on Yassir Arafat's headquarters. Washington must try everything it can to reduce the violence if it wants support for the move against Iraq, ESAI contends, adding, "Saddam and others seeking to prevent a US military strike know this, and they will do what they can, such as providing weapons, money, and political encouragement to Palestinian rejectionists, to ensure that the situation in Israel and the territories remains hot."
  • The Arab League agreeing to accept-for the most part-the Saudi peace plan. This shows efforts by the most important Arab regime to remain engaged in trying to moderate the violence, just as Washington must be seen doing the same, says ESAI.
  • The apparent show of solidarity at the Arab League meeting between the Saudi crown prince and the Iraqi foreign minister. This demonstrates Saudi Crown Prince Abdullah's willingness to stand up to the US, thereby ensuring the Saudis will not fall into lockstep with a US move against Iraq. It also could lull Baghdad into complacency about presumed Arab solidarity, thereby encouraging Saddam to tempt fate with the US.
  • Iraq's offer to recognize Kuwait and declare its peaceful intentions towards the emirate. ESAI contends this step might encourage other small Persian Gulf states, such as the UAE, to improve relations with Baghdad
  • The agreement between Washington, DC, and Moscow on the list of goods to be banned from export to Iraq or subject to scrutiny under the Bush administration's proposed "smart sanctions" regime. This is largely moot now, ESAI reckons, given Washington's shift on Saddam from containment to ouster.

The outlook

The upshot of all this scrutiny is that these developments delay-but don't halt-US plans to oust Saddam from power. Washington may want more calm between Israel and the Palestinians before launching an attack.

However, as in Afghanistan, the Bush administration has shown that it will proceed by its own timetable-and that means taking into account military logistics, such as winding down fighting in Afghanistan, restocking munitions, and repositioning forces. That could push the onset of the Iraqi compaign to the summer, or more likely, late 2002 or even early 2003, ESAI suggests.

So if the cycle of violence between Israelis and Palestinians ebbs, some of that oil price war premium will shrink in the weeks ahead, given the underlying market fundamentals, because an attack on Iraq likely is not imminent.

On the other hand, at presstime, things were getting pretty ugly in Venezuela…

(Online Apr. 5, 2002; author's e-mail: [email protected])