Political crisis weighs on oil

Nov. 26, 2012
On Nov. 21, Egyptian officials announced a ceasefire agreement—which they helped broker—between Israel and Hamas leaders to end a week of fighting.

On Nov. 21, Egyptian officials announced a ceasefire agreement—which they helped broker—between Israel and Hamas leaders to end a week of fighting. Crude prices decreased as the ceasefire appeared to be holding over the 4-day Thanksgiving holiday in the US with Palestinians ending rocket attacks on Israel, which in turn stopped its airstrikes on Gaza. Talks to solidify the agreement continue with Egyptian and US assistance.

Several analysts expected the risk premium for oil to decrease anyway with President Barack Obama’s reelection because of his less hawkish stance on Iran compared with challenger Mitt Romney. But regardless who was elected, analysts at KBC Energy Economics, a division of KBC Advanced Technologies PLC, said, “The appetite for a new military conflict is likely very low as it would require a medium-to-long-term commitment of troops and assets equaling at least the combined Afghan and Iraqi commitment at their respective peaks, according to a recent study.” This situation, they said, “warrants continued and increasing political pressure on Iran as well as on the remaining crude importers to continue their cuts.” They said, “This issue should resurface as soon as December, when some of the first sanction waivers given to Iranian crude buyers in Asia will start to expire. The oil market will therefore soon start to focus on OPEC’s spare capacity and any threats to output at vital-but-volatile suppliers like Iraq, Libya, and Nigeria. And brinkmanship will not subside, as both Israel and Iran go to their respective polls in early and mid-2013.”

Meanwhile, Egyptian protestors clashed with police after President Mohammed Morsi gave himself new powers and banned judicial and legislative review of his actions. As a result, the Egyptian stock market suffered its biggest loss Nov. 25—the start of the Egyptian workweek—since the popular revolt last year that ousted dictator Hosni Mubarak.

All of this lends credence to the claim we are living in what some call a political “Age of Brinkmanship,” characterized by principled intransigence, grandstanding, and unwillingness to compromise, unlike the “Era of Great Moderation” in the 1990s. The result is a world that ricochets from one political or economic crisis to another, unable to agree on long-term solutions.

A prime example is the political deadlock in Washington, DC, over the annual budget in face of the Jan. 1 “fiscal cliff” that will trigger automatic expiration of Bush-era tax cuts, tax increases, spending cuts, and a ban on additional borrowing beyond the US debt ceiling. “If not averted, it will induce a shock to the US economy, reducing the gross domestic product by as much as 4%,” said KBC analysts.

Industry opportunity

However, they said Congress is unlikely to allow the economy to plunge off that cliff, “no matter how deep the animosities are across the aisle,” since neither side wants to be blamed for that disaster. And that presents an opportunity for the oil industry. KBC analysts said, “Many senior oil executives and their companies overwhelmingly and very openly endorsed Romney throughout the election campaign, and now they find that they may have burned bridges to the administration in charge. They will need to mend them fast, as a number of energy issues are due to be decided by policymakers. These include environmental challenges to the US shale oil boom, planned expansion of pipeline infrastructure, and lifting several offshore and onshore drilling bans.” Industry leaders “could now step up pressure and lobbying for a bipartisan compromise and use that as a tool to reestablish a constructive dialogue with all sides,” they said.

Nevertheless, KBC analysts said. “Given the uncharted territory and belligerent mood [in Washington], it is likely that solving the forthcoming problems in the US will involve dealing with a series of successive mini-crises and coping with a succession of break-throughs and reversals rather than delivering a single big compromise bill, as was the case for healthcare.”

They said, “This is reminiscent of the Euro-zone crisis management (or lack thereof) seen in recent years on the other side of the Atlantic.” There a battle is shaping up between the European Union’s more antifederalist members and the federalists over the union’s budget. “Members like the UK or the Nordic countries have subscribed to austerity and are eager to cut spending on the EU, even if that means lower subsidies…. Others feel that cuts will exacerbate economic problems at the wrong time. This mostly applies to Southern European countries,” analysts reported.

(Online Nov. 26, 2012; author’s e-mail: [email protected])