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Print Edition> World
UPDATED: August 18, 2014 NO. 34 AUGUST 21, 2014
Oil and Turmoil in the Middle East
Geopolitical upheaval has less influence on oil prices than many assume
By Mei Xinyu

Federal Reserve leaders have predicted that they will not raise interest rates by mid-2015, suggesting the likelihood of a hike in interest rates after that time frame. Primary commodity markets will then suffer another blow.

Geopolitical upheaval

Geopolitical instability—formerly a frequent scapegoat for oil price spikes—has rattled the international oil market this year but only marginally affected prices. Some of the Gulf oil -exporting countries, such as Saudi Arabia, are major sponsors for the militant group Islamic State of Iraq and Al-Sham (ISIS). To some extent, supporting turmoil has become a profitable investment. These countries can profit from higher oil prices by funding extremists that cause chaos in the Middle East. However, it is unproven whether regional upheaval alone can push up the price of oil.

Ukraine and Syria are not major oil exporting countries. Even in Iraq—the second largest OPEC country—ISIS is unlikely to further drive up the price of oil. Indeed, Iraq's oil reserve ranks fifth in the world. The International Energy Agency estimates that Iraq alone can provide as much as 60 percent of OPEC's newly increased oil supply by 2019. Thus, the market panic that ensued when ISIS occupied north Iraq made sense at the time.

However, ISIS's impact has been overestimated.

Around three quarters of the nation's oil fields are located in Shiite-controlled south Iraq—far from the danger posed by ISIS. Most of the remaining oil, produced in Kirkuk, is controlled by Kurds in the north. These oil fields are not easy targets for the Sunni militant group. The ISIS occupation of Iraq's largest oil refinery plant has limited influence on the oil supply and export, as crude oil produced in south Iraq is largely exported to refinery plants overseas rather than the ISIS-controlled plant. According to oil shipment statistics and industry information, oil exports of south Iraq had surged to record highs in June when ISIS swept the country's north and shocked the world.

Despite the brutal slaughter of a large number of captives and civilians, ISIS is a well-organized group whose goal to establish a legitimate nation demands sound financial footing and an administrative system on par with multinational enterprises. ISIS wants to expand its territory, but their ability to do so is questionable. The militants have declared a caliphate but are not interested in reducing or cutting off crude oil production and export. Rather, they hope to seize more wealth.

ISIS leaders are well aware of the importance of sustainable revenue. By robbing a bank, ISIS can acquire a windfall, but it is not sustainable. Regionally, oil production and export is the biggest and most stable source of revenue. For this reason, ISIS encouraged oil production after occupying some oil fields in Syria, and then sold the oil on the black market for profits.

Even amidst the upheaval and uncertainty, all sides of the ongoing conflicts in the Middle East are disregarding OPEC quotas in a race to produce more oil and thus increase revenues. No matter who controls the oil field—the Kurds or ISIS—both have a strong motivation to increase oil production and export.

ISIS militants, though they have not seized pipelines, are capable of smuggling oil products. Iraq was under strict sanctions from the United Nations after the first Gulf War in 1991. Even so, the Saddam Hussein regime still managed to smuggle 200,000 to 300,000 barrels to overseas market every day during that period.

Today, militants have much greater opportunities to smuggle oil from Iraq. The latest reports have shown that oil smuggling has become more rampant since ISIS seized oil fields in Syria and north Iraq.

The geopolitical shift in the Middle East, while a source of upheaval to the lives of those in the region, is not expected to have the same disruptive effect on the price of oil.

The author is an op-ed contributor to Beijing Review and a researcher with the Chinese Academy of International Trade and Economic Cooperation

Email us at: liuyunyun@bjreview.com

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