Escalating tension over war-torn Syria rattled oil markets for good reason last week but had longer-term ramifications even more important.
With production having fallen to 182,500 b/d last year from a peak of 600,800 b/d in 1996, Syria is a minor force in the oil market. But it's strategically positioned. Oil traders legitimately worry that military clashes there might spill by accident or design into adjacent Iraq, Israel, or Turkey and then probably inflame even more of the Middle East, including the big producers.
Oil prices jump
It was no surprise, therefore, when oil prices jumped after Sec. of State John Kerry signaled in an Aug. 26 speech that the US would respond militarily to the massively deadly deployment of chemical weapons by the regime of Syrian Pres. Bashar Assad. The US had support for intervention from the UK, which sought United Nations sanction, and France, as well as from Turkey, Jordan, Saudi Arabia, and Qatar. At this writing, Assad was reported to be repositioning military assets in preparation for an attack, and people in Israel were buying gas masks. In Iraq, reporters in Iraq said the Syrian build-up aggravated sectarian clashes behind a new round of bombings in Baghdad and elsewhere.
At times like this, oil prices do usually rise.
As if the recent bloodshed and likelihood of more in and around Syria were not bad enough, the proxy implications are dreadful. Assad has the support of regionally ambitious Iran, which is beleaguered by oil-export sanctions imposed by the US and European Union and which could menace Israel through Hizbullah fighters operating out of Lebanon. Assad also has the backing of Russia.
Oil production represented by countries engaged in this conflict thus carries market weight far in excess of Syria's paltry output. Saudi Arabia, Russia, and the US are elite producers. With biofuels, the US now approaches the 10-million b/d-plus potential so far the realm only of the other two countries. The Energy Information Administration, in the reference case of its International Energy Outlook, forecasts peak US output of 12.8 million b/d of all liquids in 2020. It projects a Russian peak of 12 million b/d in 2035. Saudi Arabia, depending on developments in Iran and Iraq, could be producing as much as 15.5 million b/d or as little as 6 million b/d in 2040.
So one of the world's three most important oil producers lies close enough—physically and culturally—to the firestorm in Syria to be in jeopardy, while the other two occupy opposite sides of a geopolitical showdown. This is a mess.
And it gets worse. Syria isn't the only touchy issue between the old cold warriors. Moscow and Tehran aren't just aligned for the moment in their support of Assad. Russia overtly backs the Islamic Republic in its opposition to the US and EU sanctions, imposed out of worry about Iranian development of nuclear weapons. Russia and the US also are in dispute over missile defense, strategic-arms reduction, and trade. And just before the new anxiety over Syrian use of chemical weapons, relations between the countries soured further when Russia granted asylum to National Security Agency leaker Edward Snowden. US President Barack Obama answered that rebuke by cancelling a September meeting in Moscow with his Russian counterpart, Vladimir Putin.
Toxic externalities
The Russian-American externalities surrounding Syria thus are toxic. Russia has issued a murky warning against outside military action against the Assad regime. Yet the US has denounced the regime's use of chemical weapons in language that probably makes military action inescapable. At midweek, the administration was indicating to reporters that an attack would be limited and swift. Earlier, it said Obama, while canceling his Moscow meeting with Putin, still would attend a meeting of the G20 nations in St. Petersburg. Obviously, it's treading carefully with Russia.
That's important. The two countries once known as superpowers are petropowers now. They have global responsibility. The world needs them to get along.
