Spreading proxy wars mean a chronic oil premium

As oil prices continue to bubble, courtesy of Citi comes an analysis of the unfolding Iraq theatre that I agree with:


The fall of Mosul and the expanded territorial reach of the Islamic State of Iraq and the Levant (ISIL) may have limited immediate impacts on oil supply, but like the Russian annexation of Crimea and the potential break-up of Libya, it points to a systemic and seismic shift geopolitically. Among the many long-term geopolitical factors at work, two represent significant, persistent and growing challenges to global political stability. On one hand, the visible breakthrough of the physical barriers and political borders between Syria and Iraq and the symbolic joining of them under a wider Islamic banner in our view pose physical challenges to the maintenance of borders laid down nearly a century ago. On the other hand, divisions in Iraq along broad religious, tribal, ethnic and regional lines, like those in Libya, illustrate the growing dangers of fragmentation, particularly in petroleum– based economies.

…More broadly, in Iraq, Libya and Ukraine, fragmentation risk is also testing security arrangements and the international community’s will to respond to challenges. With the exception of border realignments imposed by Israel on neighboring territory, and until the more recent Russian annexation of Crimea, these changes have been regarded as unique and idiosyncratic, but now in the face of broad turmoil especially in the Middle East, we believe there is a danger of more persistent challenges at work to the international order. Having worked to withdraw US forces from Iraq, we expect reluctance for “boots on the ground” to return; having said that, the potential for regional instability posed by the advance of ISIL suggests potential cooperation to repel the organization, widely reported as a successor organization to Al Qaeda in Iraq, back to Syrian territory. News reports suggest that Iraqi Prime Minister al-Maliki has requested US air and intelligence support to this end…

The implication is pretty straight forward: chronic upwards pressure on oil prices as conflicts drag on rather than reach climactic conclusion.

12 Responses to “ “Spreading proxy wars mean a chronic oil premium”

  1. China-Bob says:

    While it is interesting to consider the implications for Oil prices alone from my perspective the LPG market implications will be even more profound. Today LPG is typically sold at a price linked to the Oil price yet as we are seeing even at today’s “untroubled oil price times” the LPG price has been high enough to create/develop other sources of natural gas sources (US Henry hub and Russian pipeline). Seems to me that any significant oil price spike will force LPG providers to abandon their oil priced linked long term contracts. Now that’s a huge change that’ll definitely shape the Aussie CSG industry.

    • Leviathan says:

      “Today LPG is typically sold at a price linked to the Oil price yet as we are seeing even at today’s “untroubled oil price times””


      Oil is already at eye bleeding levels. Oil producing nation Iran has been sanctioned for years now – why ? Because it limits their supply, increases price – right when the US started supplying.

      It should come as no surprise that other major suppliers such as Libya received some “liberation” – further constricting supply during the US supply resurgence.

      Interesting to note all this has occurred during their entire easing phase. Tin Foil Off.

      There are oil reserves throughout many of the smaller African producers who have also been taken off line as well. While even Venezuela has been constricted.

      We are in the midst of the MOST troubling oil price times in history, and have been for some time.

      My prediction during he 2008 spike which initiated the GFC by placing a global doubling of price inputs would be returned to as soon as the economy recovered, again impacting the global economy placing a ceiling on effective recovery.

      If the US and Canada were not producing – the oil price would be around $200 ??

  2. 3d1k says:

    ‘The implication is pretty straight forward: chronic upwards pressure on oil prices as conflicts drag on rather than reach climatic conclusion.’

    Climatic conclusion. Not at all likely to be as severe as any climactic convulsion.

    It is in times of geopolitical unrest particularly in oil producing regions when having a strong currency is beneficial to the broader economy.

    Say oil at these levels or higher and an AUD sub .80 – would wreak havoc. Unrest in various guises seems new normal.

  3. Ronin8317 says:

    Rather than a ‘proxy war’ like Us in Vietnam, a better comparison is the Thirty Year War between the Catholics and Protestants in the 1600s


    The Sunni/Shia war will draw in the entire region.

  4. Jason says:

    News reports suggest that Iraqi Prime Minister al-Maliki has requested US air and intelligence support to this end. Among the possible military options are drone strikes, used recently in operations in Yemen.

    Now this is truly interesting. I can imagine Capt. Mohammed of the Iraqi army calling up the drone operations base in Virginia on Skype to request an air strike on some militants. The US doesn’t need any boots on the ground – let the Iraqi’s do the spotting for you.

    Could we be seeing the first true ‘outsourcing’ of military power? Some huge ethical issues will come out of this, no doubt.

  5. PhilBest says:

    Every time this sort of thing happens, investments in substitutes for oil, pay back. It’s an ill wind that blows nobody any good, isn’t it?

    The “renewables first” promoters should be pretty happy…..?

  6. bskerr2 says:

    Time to break out the solar panels, produce some Hydrogen and get the car running on that I think.

    Imagine how many homes have solar panels, you could be generating free hydrogen everyday as an alternative.

    • UteMan says:

      It’s a shame the thermodynamics don’t work out. You’d need every solar panel in Sydney to produce enough energy to crack hydrogen enough to run a car on the regular. You get more energy harvesting your own farts.

      • ArchCC says:

        Yep, and that’s before you try to store the stuff. Better off just going straight to batteries.

      • UteMan says:

        Maybe batteries. I am far less optimistic:


      • ArchCC says:

        Batteries for cars/commuter vehicles.

        Biodiesel for freight transport (maybe a space for hydrogen here?).

        Utility-scale solar thermal with storage (synchronous and dispatchable) with large-scale wind and PV for bulk generation of electrical energy. Coal saved for coking.

        Small residential batteries (~5kWh) to manage intermittent generation fluctuations and load-induced voltage variability in the distribution network.

        Greater use of thermal storage, e.g. electric hot water tanks instead of gas instant hot water.

        And residential PV identified as the systemically high-cost alternative that it is.

        All of these trends have begun.