War in the Middle East and economic paralysis in Venezuela give the oil market reason to worry-but not panic. Embargo threats by outraged exporters should be less troubling.
Violence between Jews and Palestinians in Israel has escalated to crisis levels and added a fear premium to the price of crude oil. But three recent developments raise hope for peace and relaxation of the market's tension.
One important development is diplomatic engagement by the US. Although odds don't favor quick success, to not make the effort would be intolerable. Jews and Palestinians are slaughtering one another. The world, meaning the US, must respond. And active engagement moves the US away from a position that inflamed the Arab world: doing nothing while Palestinians died at the hands of Israelis wielding American weapons. That movement gives the US room to make essential moral points about terrorist murder.
Another important development is explicit support of the US peace foray from the European Union, the United Nations, and Russia. Among other things, the statement advances the UN beyond harrumphing about human rights and lip-synching past resolutions. Those resolutions-beginning with 1967's Resolution 242 enshrining the land-for-peace framework for negotiations-are fundamental to every civilized question in the conflict. The UN should be their loudest champion.
Saudi plan
The third important development is the Saudi Arabian government's peace plan acknowledging Israel's right to exist. The proposal isn't new. Israel probably can't accept it unchanged. But it's a starting point that expresses an important Arab government's readiness to recognize Israel as a nation-and by implication the international agreements underlying Israeli sovereignty-and urges other Arab nations to do the same. That's progress.
All three ingredients-US engagement, UN commitment, and Arab acceptance of Israeli statehood-are essential to peace. But they don't guarantee it. Both sides of the confrontation have extremists willing to kill just to derail negotiations. That problem awaits a solution.
Uncertainty thus joins demand recovery to lift oil prices. Politically related shutdown of Venezuela's economy, including oil production and refining, amplifies the effect.
And then there's Iraq. Trying to exploit market anxiety, Iraqi President Saddam Hussein on Apr. 1 called for a new Arab oil embargo. Crude prices spurted then receded as important producers other than Libya and non-Arab Iran rejected the appeal. On Apr. 8, Iraq halted production. But it frequently does that when renewal is due of the UN program allowing it to produce and sell oil. The next renewal date is Apr. 29. So Iraqi exports-averaging an already depressed 1.7 million b/d since the start of the year-might well have ceased anyway.
Iran's support of the Iraqi bluster lacked conviction. In an Apr. 5 sermon, Supreme Leader Ali Khamenei echoed earlier Iranian calls for Islamic producers to use oil as a weapon against supporters of Israel. His appeal was rebuffed by OPEC officials and is unlikely to be honored without a political struggle in his own country. Iran and its more than 65 million people need oil money now. For most Iranians, Iraq's economic oblivion can hold little appeal.
Resistance to an embargo by sensible Middle Eastern producers, reactive as they are to Palestinian suffering, is clear. And the new peace effort in Israel lowers the risk of physical conflict spreading to nearby oil producers.
So the market probably faces a supply deficit-probably brief-of no more than the combined exports of Venezuela and Iraq: 4.2 million b/d of crude and products. That's roughly the size of the shortfall that followed Iraq's invasion of Kuwait in 1990, to which a surprised market adjusted quickly.
Market buffers
Recent price movements anticipate the new upsets. And the market itself has buffers. Excess production capacity worldwide amounts to 7.5-8 million b/d, according to the US Energy Information Administration. More idle capacity than usual-about 500,000 b/d-lies outside of OPEC. Inventories, although beginning to fall in some countries, remain at comfortable levels. Industrial countries have strategic reserves. Increased supply from these sources, as well as production stimulated by elevated prices, would prolong the self-imposed deprivation of any exporter irrationally curtailing exports for political reasons.
The oil market can handle its likely supply challenges. The world's greater worry should be anything that blocks peace in Israel.
