On Wednesday, the day before the anniversary of the 9/11 attacks, US President Barack Obama told Americans about his blueprint to deter the jihadist Islamic State of Iraq and the Levant (known variously as the ISIS, ISIL or Islamic State). Obama's plans include increased air strikes against the terror outfit and provide training and weapons for regional groupings such as the Kurds and other Shia factions.
According to reports, the Kurds have directly approached India for help with fighting IS. They also want India to invest directly in Kurdistan, which holds significant oil reserves. Baghdad does not currently share its oil revenue with Kurdistan. This approach has come alongside Indian intelligence agencies launching investigations on jihadis of Indian origin fighting with the IS in Iraq.
Instability in West Asia is never good news for emerging economies. As a net importer of oil and gas, India relies heavily on producers such as Saudi Arabia, Qatar, Iran, Iraq and others for its vast energy needs. India imports around 80% of its oil requirements annually.
Regional tensions in West Asia usually have a direct impact on the price of oil. Any sign of geopolitical friction is reflected in global crude prices, which in the past few years have comfortably risen above $100 per barrel (per barrel). In fact, the price is so high, experts say that it is enough to absorb substantial geopolitical shocks.
Import, subsidise, distribute
India spends a large sum of its annual budget importing oil at market price, and then selling it to its citizens at subsidised rates. High oil prices are often both economically and politically unacceptable in India. However, the price at which the commodity is imported is determined by political conditions at the source of the oil.
Oil pricing is almost exclusively controlled by the Organisation of Petroleum Exporting Countries, a Vienna-based forum that includes most of the major oil producers in the world, including the West Asian nations and Venezuela. Pricing depends on how OPEC members control their production numbers.
Stabilised prices
On the face of it, the geopolitical tensions in the parts of West Asia that produce some of the highest volumes of oil might be expected to cause prices of crude to spiral. Paradoxically, they seem to have pushed the price of global Brent crude and West Texas Intermediate southwards. This when West Asia is staring at the possibility of all-out sectarian conflict; Western nations have announced sanctions on Russia – the world’s largest producer of oil – over the Ukraine crisis; and the relationship between Iran and the West is already precarious.
When Obama announced that strikes against ISIS are going to increase, and may spill over into Syria as well, oil prices in Asia increased by a few cents, but remained well below the $100 per barrel mark. While it is too early to speculate whether this will continue, experts have arrived at some reasons for this uncharacteristic stability: caution, regulation and, surprisingly, lower global demand.
Caution, in this discussion, refers to the relatively new global understanding that this is a commodity that must not be taken for granted. Regulation here refers to the new energy policies that most states follow, which emphasise things such efficiency and discourage hoarding.
But what is the reason for the lowered demand?
The slowdown in Asian economic growth has stymied the rise in oil prices. The Indian economy is well behind the targeted 8%-9% annual growth rate, and even China’s demand for oil has fallen on account of slower economic growth. This year, India has consistently outpaced China in oil consumption, according to Barclays PLC. India is the third-biggest oil consumer in Asia after China and Japan and accounted for about 4.2% of the global oil consumption in 2013.
Global economic mosaic
There are more fundamental factors at play as well. Robert Kahn and Steven A Tananbaum, senior fellows for international economics at the New York-based Council on Foreign Relations, have charted the recent disconnect between rising geopolitical tensions and stability in global oil markets. Kahn and Tananbaum highlight that it is not the threat of prolonged war in the Middle East, or possible long-term detachment between the West and Russia, but a return of the economic crisis-like conditions in Europe that would be more lethal to global economics, including oil prices.
Kahn and Tananbaum see Syria, Iraq and the Ukraine crisis as “small pieces of the global economic mosaic”.
Even as IS and other militia groups operating in Syria take over many of the country’s oil fields, it is important to remember that Syria’s oil production is not large enough to cause a major shift in global pricing. Iraq is a different story, as it has sizeable reserves, mostly in the southern part of the country. Over the past few days, IS's progressive capture of Iraqi territory has been slowed by US air strikes and retaliation by the Iraqi army and Kurdish peshmerga. IS has not made significant strides in capturing the capital, Baghdad, or the country’s southern regions.
The US Energy Information Administration now expects oil prices to stay below $100 per barrel till the end of this decade. While this may signal more difficult times for producers, emerging-economy oil importers such as India may benefit greatly from this unexpected stability.
According to reports, the Kurds have directly approached India for help with fighting IS. They also want India to invest directly in Kurdistan, which holds significant oil reserves. Baghdad does not currently share its oil revenue with Kurdistan. This approach has come alongside Indian intelligence agencies launching investigations on jihadis of Indian origin fighting with the IS in Iraq.
Instability in West Asia is never good news for emerging economies. As a net importer of oil and gas, India relies heavily on producers such as Saudi Arabia, Qatar, Iran, Iraq and others for its vast energy needs. India imports around 80% of its oil requirements annually.
Regional tensions in West Asia usually have a direct impact on the price of oil. Any sign of geopolitical friction is reflected in global crude prices, which in the past few years have comfortably risen above $100 per barrel (per barrel). In fact, the price is so high, experts say that it is enough to absorb substantial geopolitical shocks.
Import, subsidise, distribute
India spends a large sum of its annual budget importing oil at market price, and then selling it to its citizens at subsidised rates. High oil prices are often both economically and politically unacceptable in India. However, the price at which the commodity is imported is determined by political conditions at the source of the oil.
Oil pricing is almost exclusively controlled by the Organisation of Petroleum Exporting Countries, a Vienna-based forum that includes most of the major oil producers in the world, including the West Asian nations and Venezuela. Pricing depends on how OPEC members control their production numbers.
Stabilised prices
On the face of it, the geopolitical tensions in the parts of West Asia that produce some of the highest volumes of oil might be expected to cause prices of crude to spiral. Paradoxically, they seem to have pushed the price of global Brent crude and West Texas Intermediate southwards. This when West Asia is staring at the possibility of all-out sectarian conflict; Western nations have announced sanctions on Russia – the world’s largest producer of oil – over the Ukraine crisis; and the relationship between Iran and the West is already precarious.
When Obama announced that strikes against ISIS are going to increase, and may spill over into Syria as well, oil prices in Asia increased by a few cents, but remained well below the $100 per barrel mark. While it is too early to speculate whether this will continue, experts have arrived at some reasons for this uncharacteristic stability: caution, regulation and, surprisingly, lower global demand.
Caution, in this discussion, refers to the relatively new global understanding that this is a commodity that must not be taken for granted. Regulation here refers to the new energy policies that most states follow, which emphasise things such efficiency and discourage hoarding.
But what is the reason for the lowered demand?
The slowdown in Asian economic growth has stymied the rise in oil prices. The Indian economy is well behind the targeted 8%-9% annual growth rate, and even China’s demand for oil has fallen on account of slower economic growth. This year, India has consistently outpaced China in oil consumption, according to Barclays PLC. India is the third-biggest oil consumer in Asia after China and Japan and accounted for about 4.2% of the global oil consumption in 2013.
Global economic mosaic
There are more fundamental factors at play as well. Robert Kahn and Steven A Tananbaum, senior fellows for international economics at the New York-based Council on Foreign Relations, have charted the recent disconnect between rising geopolitical tensions and stability in global oil markets. Kahn and Tananbaum highlight that it is not the threat of prolonged war in the Middle East, or possible long-term detachment between the West and Russia, but a return of the economic crisis-like conditions in Europe that would be more lethal to global economics, including oil prices.
Kahn and Tananbaum see Syria, Iraq and the Ukraine crisis as “small pieces of the global economic mosaic”.
Even as IS and other militia groups operating in Syria take over many of the country’s oil fields, it is important to remember that Syria’s oil production is not large enough to cause a major shift in global pricing. Iraq is a different story, as it has sizeable reserves, mostly in the southern part of the country. Over the past few days, IS's progressive capture of Iraqi territory has been slowed by US air strikes and retaliation by the Iraqi army and Kurdish peshmerga. IS has not made significant strides in capturing the capital, Baghdad, or the country’s southern regions.
The US Energy Information Administration now expects oil prices to stay below $100 per barrel till the end of this decade. While this may signal more difficult times for producers, emerging-economy oil importers such as India may benefit greatly from this unexpected stability.
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