I recently spoke with a good friend of mine and energy maven, Chris Edmonds, founder of Enerecap Partners, a boutique energy research and investment firm. I often like to address the price of oil and how it impacts you and me as consumers at the pump. Even though school starts again on Monday, it’s still summer driving season to me. So what does all the havoc and turmoil in the Middle East mean for oil prices and your gas tank?
This is a subject that has been at the top of our minds, especially as ISIL marches across Iraq and the fighting continues in Israel. We’ve all seen prices for oil jump before when there are issues in the Middle East. And it’s even more prevalent in the summertime months since this can be a real pain point for many of us as we are traveling more.
As Chris and I started talking, he was quick to explain exactly why we see fluctuations in the markets and at the gas pumps when issues arise in the Middle East.
“Oil prices always react to fear more so than even real production numbers," Chris Edmonds says.
Instability in the Middle East puts a geopolitical premium on the price of oil.
This doesn’t just apply to the issues inside the borders of Iraq (or Israel, despite not being an oil producer), either. We have to think of the fighting as a regional issue. With the entire region of the Middle East being wound up and ready to fall into political disrepair, we are flirting with that geopolitical fear premium.
ISIL would love nothing more than to march on the large oil fields in the southeast of Iraq, which could obviously cause issues with oil production. It is commonly thought that if ISIL were to take the oil fields they would not be looking for profit. They would likely just leave them in disrepair, preventing millions of barrels of oil from reaching world markets every day.
The fighting in Israel, a separate but not wholly unrelated issue, has not been directly impacting the geopolitical premiums on oil. However, when we’re talking about issues in a single Middle Eastern country, we’re really talking about issues that are inclusive of the entire region.
Through all this, Chris did reassure me that the prices for oil are currently set to stay where they are or to even go slightly lower. The question that keeps me up at night is what will be the trigger point that could send them meaningfully higher?
Iraq currently produces 3.5 million barrels of oil a day. While it’s scary to think of that rich resource drying up for the U.S., we are actually not as reliant on Iraqi oil as you might think. We are producing more oil in the U.S. today than we have in decades. This could really help to minimize the impact of possibly losing Iraqi oil exports.
Also, the U.S. actually imports more oil from Canada than any other country in the world. I’m personally not worried about Canada having any geopolitical premiums put on the price of their oil anytime soon. In fact, the oil markets are actually significantly discounting the price of Canadian oil.
The Keystone Pipeline clearly cannot be ignored in this context. It is a project that has huge ramifications for both energy security and energy pricing here in the US. We seem to have grown accustomed to $3.50 gas prices, but I wouldn’t be upset if I were paying $2.50 or less.
While no one measure would completely remove the US’s reliance on Middle Eastern oil, it’s foolish to pretend like we don’t have an arsenal of great options to combat the fear premium on oil.
If you’re looking to get a new car, check out the Nissan Leaf. It’s practically free in Georgia, and should the geopolitical premium I mentioned strike again… you’re not paying hand over fist for everyone else’s fear.
Wes Moss, the Chief Investment Strategist for Wela, writes a weekly blog for AJC.com. You can find his original article here.