As I write this commentary in the early morning hours, West Texas Intermediate crude is inching its way towards $70/barrel.  I do not think that anyone in this business doubts that oil prices will hit $75 this year and possibly much higher.  Oil prices have not been this high since ISIS was destroying artifacts in the ancient city of Palmyra.

This morning The Guardian, in the UK, reports that the United Nations is discussing the possibility of taking action.  The problem is that Russia would veto any action in the UN security council:

“Western governments, worried that the impasse is weakening the wider authority of the security council, want to pick up a rarely used route, first set up in the 1950 Korean crisis. Called “uniting for peace”, it would enable nine members of the 15-strong security council to bypass a Russian veto and refer the matter to a full vote at the general assembly. It would then require a two-thirds majority by the general assembly for an attribution mechanism to be agreed.”

The last I remember, the UN went to war in Korea in the 1950s – “peace keeping effort”.

So as war looms over the Middle East once again, tension in Syria can only spell higher oil prices, since war brings uncertainty; and thus, a risk premium on commodities.  In the advanced economies, high oil prices are critical for the refining industry – it covers the cost of higher wages and equipment prices required by those economies.  Here is a short review of when tensions around the world (particularly in the Middle East) led to spikes in oil prices:

  • Arab oil embargo, 1973
  • Iranian revolution, 1979
  • Persian Gulf War, 1990
  • US missile strikes in Iraq, 1996
  • US invasion and occupation of Iraq, 2003 to 2008 (the actual occupation ended in 2011 but the banking collapse of 2008 torpedoed oil prices)
  • Arab Spring, 2010 to 2012
  • Conflict in Syria until ceasefire, 2011 to 2016

There is one important lesson to learn from the history of high oil prices – enjoy it while you can.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s