As terrible as the impacts from the terrorist attacks on New York and Washington, DC, this week have been in human and geopolitical terms, the immediate impacts on oil markets have been negligible.
The long-term impacts, however, are a giant question mark. The outlook ranges from another price collapse to a long-term sustained high oil price.
Everything depends on what form the US retaliation will take and if any nation other than Afghanistan-which harbors the chief suspect, Osama Bin Laden-will be the target. Afghanistan's hydrocarbon output is negligible in terms of the global oil industry. And it is not particularly cozy with any of the major Persian Gulf oil exporters, so it is unlikely that any significant volume of oil exports will be lost to markets because of a strike against the Taliban-led nation.
The more worrisome prospect for oil markets comes from speculation from some intelligence experts that Bin Laden's group may have received some help from a Persian Gulf nation or other terrorist groups sponsored by Persian Gulf nations. Some have speculated that Iraq may have connections with Bin Laden. If that proves to be the case, then President George W. Bush's vow to find and punish the perpetrators of the attacks and to make no distinction between the terrorists and those who harbor them catapults such concerns into a whole new realm.
Even the speculation that a Middle Eastern nation might somehow be even peripherally involved in the worst terrorist attack in US history initially spiked crude prices up by $3/bbl this week-although dated Brent had settled back about a dollar by yesterday (NYMEX, of course, has been closed since the attacks and has struggled yesterday and today to go back on line).
Even the slightest trace of a connection between Bin Laden and a Persian Gulf oil exporter could spark enough apprehension over a possible military strike against that nation-Iraq and Iran in particular come to mind-to keep Brent and NYMEX crude well above $30/bbl.
At the same time, the Bush administration has vowed that it deems the events of Sept. 11 to be an act of war and that the US will wage war against terrorists everywhere. But no one is suggesting that this might include the IRA, Colombia's FARC and ELN, or Basque or Tamil separatists. In fact, the administration specifically singled out Hamas and Hezbollah, so it is apparent that the war will be waged against terrorist groups based or with roots in the Middle East and hence sympathetic to the Palestinian cause. How far will this pledge take the US? If Kabul hands over Bin Laden (unlikely), that still wouldn't end the war against even Bin Laden's group. The Saudi mastermind who is believed to have masterminded so much death and destruction in terror attacks targeting the US (the embassies in Africa, the USS Cole, the earlier World Trade Center bombings) has several thousand followers in several dozen cells around the world; he has boasted of having tentacles in 50 nations, but the likelihood is that most of them are located in the Middle East and North Africa.
The Bush administration also has put the world on notice that this retaliation will not be a pinprick strike, such as President Clinton authorized against Bin Laden in Sudan and Afghanistan in response to the attack on the African embassies. It will be a multiyear, sustained campaign. Because of the likelihood of sustained uncertainty over which Middle Eastern nation might be the next on the list to host (unwittingly or not) a US-targeted terrorist cell, that alone is likely to add a premium of perhaps $1-3/bbl to the price of crude for as long as the campaign endures. We saw a similar phenomenon with the Iran-Iraq war, especially with the recurring threats to Persian Gulf shipping. Call it a "fear premium"-even though there were ample supplies of crude on the market, just the threat of a disruption should a tanker loading terminal be destroyed built an extra dollar or two into the price structure of crude oil at that time. We are likely to see this phenomenon repeated for the duration of the antiterrorism war.
OPEC's role
OPEC will play a significant role in mitigating the extent of any price spikes and even the size of the antiterrorism war's fear premium.
The physical fundamentals of the market at present are such that OPEC's Sept. 1 production cut was bringing the market into stability-at least from their perspective of keeping the OPEC basket crude price within the band of $22-28/bbl.
The group's cuts took effect almost as quickly as it took the group to cobble the latest accord together. According to Purvin & Gertz, Houston, October OPEC supply levels were expected to be flat with September's, where allocations have been reported at 30% below full contract levels for term US and European customers and 15-17% lower for standard Japanese contracts.
On the other hand, P&G notes, OPEC's quotabreaking has been "excessive" in recent months. It pegs the group's output at 890,000 b/d above quota in July and 700,000-1 million b/d in early August. Iraqi output reached 2.75 million b/d last month vs. 2.16 million b/d in July. Considering where OPEC's pledged production levels are, the group's spare capacity is nearly 5.5 million b/d, P&G estimates.
We have countervailing forces at work on demand. While demand was already slumping below year-ago levels, due to the state of the global economy, the economic repercussions from the terrorist attacks (massive losses by airlines, insurers, and financial institutions) will contribute to the overall worsening of the economy. In addition, the grounding and subsequent cutback of air travel-as fewer flights are possible because of the stepped-up security measures-will make a sizeable dent in jet fuel demand.
On the other hand, there is strong evidence of hoarding of fuels, which contributes to volatility in the markets. The fear of shortage thus becomes a self-fulfilling prophecy.
A rough guess is that these two demand trends will more or less cancel each other out.
But all of this of course is pure speculation.
After Sept. 11, America and even the entire world will never be the same. And neither will the petroleum industry.
