The Oil "Crisis Spike" Is Just Getting Started

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First there was the crisis in Ukraine. Then, seemingly out of nowhere, Iraq exploded into chaos again.

Both testify to one simple truth about today's energy sector: Geopolitical factors are the quintessential wild cards when it comes to estimating energy prices.

As for crude, prices have been subdued both yesterday and this morning following a crisis-related spike. But with two full-blown crises now looming, you can bet that's not going to last.

Oil prices are now likely headed higher.

In this case, supply and demand only works in the textbooks. These days, geopolitical events can quickly outdistance the "market-only" factors.

That's especially true in Iraq, where insurgents of the Islamic State of Iraq and the Levant (ISIL) are still on the move…

The Dangerous "Balance" in Iraq

Of the two crises, this is the one that concerns Americans the most. It may be only 275, but U.S. troops are moving back to Iraq.

On top of that, Washington is going to start consultations with Tehran. The entire region – from Riyadh in Saudi Arabia, through Amman in Jordan, to Ankara in Turkey – is in turmoil following the Sunni insurgency.

But when it comes to the impact this crisis has on oil prices, this is one of those classic cases where the unfolding events have more to do with perceptions than reality. So far, the fighting does not affect oil production or export routes.

Northern oil, accounting for about 20% of all national extraction, is centered around Kirkuk, with the export venue being a major pipeline system to Ceyhan in southeastern Turkey. This area is now controlled by the semi-autonomous Kurdistan Regional Government (KRG) in Erbil and its very effective militia, the Peshmerga.

The absolute majority of Iraqi oil comes from the south. To the extent that ISIL has Baghdad as its objective, the southern oil fields are not in danger.

ISIL is a Sunni uprising in what is a Shiite-dominated country. The southern region centered around Basra is heavily Shia and becoming closer with each passing day to neighboring Iran, also a Shiite country.

The south also has its own militia, and they will present major problems to any further ISIL advance. In addition, there have been reliable reports over the past few days that detachments of the Iranian Revolutionary Guard and other "volunteers" have been moving into southern Iraq.

Just yesterday it appears an Iranian general arrived in Basra to assist in the coordination of Shiite defenses for the area. The reality of what is happening on the ground will dictate that Washington bow to the inevitable and accede to some enhanced Iranian presence.

The Sunni Insurgency and Oil Prices

This will initiate the first of three factors that will impact global oil prices. And you won't need to have the uprising take over oil fields for this to have an effect.

First, the Iranian moves and what will now be an intensifying drive for outright independence in northern Kurdistan run the risk of trifurcating the country along ethnic and religious lines – Kurds controlling the far north, Sunnis the central portion of the country, and Shiites the south.

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Elton | June 23, 2014

    Again, we the people who are struggling to survive this Obomanation will pay the price at the pump for what happens in Iraq's holy war when they only contribute 4 percent in crude in the world market. What has the middle east cost the American Taxpayers not to mention the lives of so many Americans. This administration is determined to support the Muslim countries at the expense of the American mostly Christians. The only way for this country can survive, that I am a veteran of, is to vote everyone in Congress out of Office that does not due their duty and Support the American People and the Constitution of the United States, or will not vote to impeach this Imperialist President who totally disregards the Law of the Land.

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