As recently as 18 months ago, terrorist attacks like those in Paris last Friday night would have caused an immediate (and sizeable) spike in oil prices. That's because, as we can all remember, destabilizing or violent actions on the international stage have increased the uncertainty factor, fueled volatility, and prompted short-covering.
But on Monday, the markets saw a mere 2.5% increase in benchmarks West Texas Intermediate and Dated Brent in New York and London. On Tuesday, both benchmarks moved back down only to rise a few pennies yesterday.
That action says something about the way investors felt the impact of the Paris attacks: Western markets simply won't be dictated to by terrorists.
That's not to say ISIS isn't a "player" in the global oil market. It certainly is, but its role – and impact – is more complicated and insidious than the traditional "geopolitical factor."
Let me explain…
Prices Today Are All About Supply
We exist in a very different environment today than we did in 2013, and oil is no exception.
Moves in either direction on the demand side have an impact in oil prices, of course. Worldwide consumption is increasing again, so much so that projections show the highest daily levels on record by the end of the year.
But these days, price increases are dependent primarily upon what occurs on the supply side of the equation. And that's what is keeping prices restrained.
As I have observed in Oil & Energy Investor on multiple occasions, the global oil glut is largely a result of huge shale and tight (unconventional) production, along with mushrooming extractable reserve volumes.
That means the only geopolitical factor likely to push prices up is one that calls the sourcing and supply of oil into question. As horrific and terrifying as Friday's outrages were, there's no oil to be had in Paris' 11th arrondissement.
As a result, Monday's brief pricing pop reversed itself. But there are some supply developments underway, and ISIS is driving them.
ISIS Needs Oil Revenue… And Lots of It
First, ISIS needs its own oil revenue to fund its agenda and its estimated 53,000 to 238,000 fighters.
In a report I wrote a decade ago, I calculated that a terrorist organization needed at least $14,000 to support each fighter. And that was without the cost of equipment, armaments, or other expenses directly related to the operational side. That figure is no doubt even higher today.
Now, ISIS has a huge war chest, provided by everything from gold and currency stolen from bank vaults in the cities and towns it has overrun, to the black market sale of antiquities it has looted from dozens of ancient archaeological and tourist sites in the territory under its control.
ISIS also relies on the more "traditional" terrorist revenue streams from kidnapping, extortion, smuggling, and blackmail.
Nonetheless, the organization requires a considerable daily revenue flow from the sale of oil harvested from occupied fields.
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.