The energy industry provides the world’s superpowers with what it could be considered the most essential commodity to continue thriving. Just by understanding the concept of what that truly means we can expect then that energy in all ways, especially crude oil, to be extremely sensitive to any type of conflict that could in some way affect open and free trade. No matter which commodity we talk about, geopolitical issues will have a strong influence on their prices when they are products that are globally traded and these issues threaten that freedom of trade.
Geopolitics is defined as “the study of how geography and economics influence politics and the relations between countries”. Anything that threatens the relationship between countries due to the instability of the land, political issues, economic distress and many other reasons that can cause a global concern, are considered risks to geopolitics.
Lately, we have been hearing a lot of stories in the news that are the cause of concern. Things such as the advancement of nuclear capabilities and testing by countries like Iran and also North Korea’s escalating threats against the United States and its allies by means of ballistic missile testing and the advancement of their strike capabilities. These and many other similar headlines have within them the elements of risk that can cause variations in the price of crude oil not only in the United States but also all over the world.
The world is concerned with this because the level of escalation assumed by North Korea has become a cause of true worry to everyone watching. In the event of an actual attempt to attack, North Korea would unleash a domino effect that will dramatically spike crude oil prices and its derived products.
All we need to do is look a few years back and history will show us how in the early 70’s, a phenomenon called the “First Oil Shock”, taught us how this influence held by geopolitical unrest weighs heavy on crude oil prices. Everything started because of the support the United States provided to Israel during the Yom Kippur War. This position taken by the US did not sit well with members of the OPEC so an embargo was placed on all oil shipments bound to the United States. The restriction was only in placed for a few months, but it was enough to take oil prices all the way from $3 a barrel to more than $12, and also greatly affect the US GDP.
The “Second Oil Shock” came in 1979 during the Iraq-Iran conflict, in which prices more than doubled from $55.97 all the way to $118.78. Both countries had their ability to produce oil greatly diminished due to the conflict, so a wave of fear of possible interruption of trade was sent through the world and prices skyrocketed.
Both of these examples are clear in showing us how just the fear of conflict and geopolitical unrest can affect the global market. Prices usually come down after conflict subsides and there is also an oversupply and overproduction of crude during these spells of conflict.
Let’s take a look at the situation that the world is going through today. North Korea continues to be a source of unrest with their constant aggressive actions that make all key players nervous. As a matter of fact, China could be considered the one country that is keeping North Korea at bay, since they would not be benefitted by the initiation of a conflict. The truth is, that if North Korea were to start any type of actual attack against, South Korea, Japan or the United States; the prices of pretty much every globally traded commodity and not just crude oil would skyrocket and the world would go into disarray.
Last Tuesday, the world was shocked by the images of civilians suffering the consequences of chemical warfare used by the Syrian Government, led by its President Bashar al-Assad. Retaliation came swiftly from the United States and president Trump ordered a military response in the form of fifty-nine “Tomahawk” missiles that destroyed the Syrian airbase where the chemical attack allegedly had come from.
Crude oil prices went up within just fifteen minutes of the news of the attack hitting the financial market. That is a clear indicator that any type of geopolitical issue directly and immediately affects the prices of oil.
What is happening next? At this point, it is very unclear. On one side, the United States seems to be forging a stronger alliance with China, but at the same time is severing any possible ties with Russia and killing any chances there were of the somewhat amicable relationship between both countries that we had been witnessing lately. If anything were to escalate, the prices of commodities would be one of the places where we will see tangible consequences.
For more great articles, visit Suzzanne Uhland’s blog today.
* Featured Image courtesy of Anthony at Flickr.com