Spreading proxy wars mean a chronic oil premium

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

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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.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.