29 Aug Supply Chain Costs: Middle East rumblings boost oil and gas prices
As the U.S. maneuvers toward a possible military strike against Syria, oil and gas prices are spiking.
Some energy analysts, however, contend that the oil and gas markets are overreacting because Syria doesn’t produce much oil.
Still, in the week since a suspected chemical weapons attack against Syrian rebels killed hundreds, oil prices have jumped $7 a barrel to $110.10. On Wednesday, benchmark West Texas Intermediate crude hit a two-year high on the New York Mercantile Exchange.
That’s a big enough increase to boost gas and diesel prices at the pump by 18 cents a gallon, but pump prices are just now beginning to rise. In the Kansas City area, average area gas prices increased overnight Tuesday by 10 cents to $3.56 a gallon, according to GasBuddy.com.
More increases are on the way.
F.J. Cronenwett, director for wholesale fuels for Dodson Oil, an area fuel distributor, said that starting Wednesday evening, he expected retail stations to be charged 4 cents a gallon more for gasoline. It was unclear when the increase will be posted on retail pumps.
The rise in fuel prices is triggering cynicism among some of the motoring public, especially about commodity traders and investors who have been bidding energy prices up.
“It’s very self-serving,” said Lee Klass, an independent truck driver. “They’re exploiting the issue.”
Analysts agree there are reasons to be skeptical. Syria produced 330,000 barrels of oil a day in 2011, or less than 0.5 percent of world production, according to the Energy Information Administration. The country used most of what it produced then, and its output subsequently has dropped by half because of its civil war.
In short, Syrian oil exports aren’t a factor on world markets.
“Any time there is a conflict in the Mideast, whether or not any oil is involved, the initial reaction is a rise in prices,” said James Williams, an analyst for WTRG Economics, which tracks energy markets.
Oil prices also climbed with the unrest in Egypt because of fears that its Suez Canal, which is used to transport oil, would be closed. But the canal hasn’t been affected.
The mentality of energy markets, Williams said, has evolved into dwelling on the possibility, no matter how small, that any unrest or conflict in the Mideast could create a major supply disruption.
“Is it totally irrational? No,” he said. “Is it usually irrational? Yes.”
A conflict with Syria could spill over into Turkey, for example, which has pipelines used by Iraq to export some of its oil. That would disrupt supplies, but they could easily be replaced by Saudi Arabia.
A nightmare scenario is one that has a U.S. strike on Syria triggering other attacks and getting other countries involved, affecting production throughout the Middle East. That’s deemed very unlikely but can’t be ruled out completely.
“This market is reflecting anxiety about the Middle East,” Adam Wise, who manages a $6 billion oil and gas portfolio, told Bloomberg Business News. “More news-driven price spikes are on the table.”
That anxiety and the uncertainty could end as soon as the military strike occurs. That’s what happened in 2011 when NATO bombed Libya. Oil prices fell the day after.
The question for now is whether oil prices are high enough to reflect the potential risk. Some believe there is room for them to rise further, while others believe we’re already there.
“Personally, I believe there is enough risk premium in this stuff,” said Steve Mosby, a partner in Admo Energy, which helps retail stations buy gasoline and diesel.
One bright spot for the U.S. is that even with the higher oil prices the country is producing more oil and relying less on imports. Because more of the revenue from higher oil prices is staying here, the effect of those high prices on the economy is somewhat cushioned, said Jay Hakes, an author of a book on energy independence and former head of the Energy Information Administration.
He said the U.S. and other countries had additional options to avoid an oil shock. Saudi Arabia has shown its willingness to replace supply shortfalls, and the U.S., Europe and Japan have strategic petroleum reserves to tap.
“You do have some insurance policies out there,” he said.
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