There are several catalysts driving oil prices higher over time. Some are economic, some are geological, and some are none of the above. In the latter category, Nigeria and Saudi Arabia figure prominently in the news of late as poster children for disturbing examples of what awaits the bigger oilfields that occur all too infrequently on the planet for satisfying the increasingly ravenous consuming crowd.
Politics reborn as war on low and stable energy prices is leverage in the global economy for those who, rightly or wrongly, think they have no other means of expression and influence. For consumers, it’s a new tax on an old concept: the cost of doing business.
That cost is vulnerable to upside spikes in the short run, and a slow but steady rise in the long run. For the former, Friday’s attempted but ultimately foiled attack on the Abqaiq oil facility in the Saudi Kingdom was one more wake-up call about the nature of the energy business in the modern era. The site chosen for the attack was hardly a surprise. Abqaiq processes about two-thirds of the 9.5 million barrels a day of Saudi production, home of the world’s largest single source for crude exports.
Reportedly, the attack on Saudi production was hatched by Al Qaeda. It’s a stark reminder that terrorism in all its virulent forms continually strives to drive up the price of oil. Destruction as a means of political statement is alive and well in the 21st century. For clarity on that point, the organization issued a statement to focus the public’s expectations. In the case of Friday’s assault, the failure to damage the Saudi facility is only a temporary delay rather than a permanent setback, based on the promise of more Al Qaeda attacks on oil processing complexes.
But even in failure there is success when it comes to affecting the price of the world’s most valuable commodity. A barrel of crude closed at a bit more than $58 last Thursday in New York; 24 hours later, after news of the Saudi attack had made the rounds in headlines, oil was changing hands at more than $62 a barrel. The mere attempt at attack is almost as damaging as completing the act when it comes to oil prices.
Some of the recent price spike can be attributed to events in Nigeria, where the Movement for the Emancipation of the Niger Delta has launched its own brand of attack on the business of oil production and exporting. That too is a problem for the United States, for which Nigerian exports are the fifth highest.
Politically, the Nigerian assault on the oil business is distinct from Al Qaeda’s, although there’s a common thread of trying to take back the resource for “the people,” or at least making it tougher for Western consumers to buy the oil.
In the long run, neither group will succeed in turning off the oil spigot, but they will succeed in adding a risk premium to the price of crude in the long run. The size of the risk premium is debatable, although it’s a safe bet that it will fluctuate over time and remain considerable.
Risk analysis has long been central to projecting the price of oil, and the art can only become more valuable for analyzing crude. We can start by going country by country for listing the size and scope of the potential hazards that loom over oil. For December 2005, the Energy Information Administration lists the top-10 countries of origin for U.S. imports of crude run as follows, in descending order:
Canada (1.899 million barrels per day)
Mexico (1.707 million barrels per day)
Saudi Arabia (1.438 million barrels per day)
Venezuela (1.183 million barrels per day)
Nigeria (1.174 million barrels per day)
Angola (0.425 million barrels per day)
Iraq (0.390 million barrels per day)
Ecuador (0.340 million barrels per day)
Kuwait (0.268 million barrels per day)
Algeria (0.212 million barrels per day).
Canada is the long source of good news, being the single-largest foreign provider of oil to America that’s at once stable and allied with the U.S. Alas, it’s downhill from there. As anyone with a passing knowledge of foreign affairs understands, this top-10 list is exposed to a broad array of risks that are as entrenched and unmovable as any on the planet.
Historically, the United States has sought to manage and limit those risks by the standard approach: diversification. By developing a large and diverse portfolio of exporting sources, America has kept risk under control. But time is running out for expecting the strategy to deliver the miracle cure it’s dispensed in the past.
Two stubborn trends are conspiring to render the diversification a bit less effective with each passing year. One is driven by geology. As the opportunity for finding large, new oil fields fades in politically stable nations, power and influence in pricing crude slowly but inexorably shifts to those country’s with the lion’s share of known supply–country’s that are forever on the precipice of a revolt of one kind or another. Who are these nations? The key ones can be found in the top-ten list above. Collectively, the top-ten list presents a rainbow of ebbing and flowing dangers that threaten that most precious but too often disregarded American resource: cheap energy.