The Effects of the Middle East on Oil Prices Explained


Oil is possibly one of the most vital resources across the globe. Used in various aspects of day-to-day life; such as transport, cooking, heating, and electrical applications; and in almost all industries, it affects international and local economies daily. The Middle East; the geographical area above Northern Africa; is closely tied to the production and thereby also the price of oil, due to the fact that it contains large amounts of naturally occurring oil reserves. This means that the politics and international affairs between the various countries and political groups populating the area have dramatic impacts on the accessibility to oil resources, and therein the production process which influences the cost of oil on a global scale. To understand the true relationship between the Middle East, its events and political happenings, and the production and cost of oil, it is important to look at the first step in determining the cost of oil: its production.

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Oil production requires huge amounts of planning and logistical preparation for future demands and market shifts. Contrary to popular belief, the production of oil is not a simple process. Crude oil, the fossil fuel comprised of ancient compressed biological matter from plants or animals, is extracted from underground reserves. Once extracted, it is boiled with super-heated steam, and distilled in a distillation column, separating into gasses, naphtha, gasoline, kerosene, diesel, lubricating oil, heavy gas oil and residues. These bi-products of the process are separated into individual chambers for collection.

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This lengthy and complex process means that oil refineries and companies must order crude oil months in advance to allow for enough time to produce purified oil products to keep up with demands. The agreements which allow for these pre-emptive orders are known as “future contracts” and are influenced by forecasting what the price of crude oil will be at that time. This is called “speculation” – it is the educated and calculated guessing of how a commodity’s price will rise or fall up to a certain point in the future. To speculate successfully, all factors must be accounted for, including – and in the case of the Middle East, most importantly, the disruption of supply.

Future contracts allow oil companies to maintain production of refined products effectively by purchasing their oil supply for the upcoming months. However, because of the nature of these agreements, and their heavy dependence on oil supply, they are tightly tied to factors affecting the accessibility to crude oil. This essentially means that they are dependent on how easily the crude oil can be extracted. Without access to extract, production would stop, leaving the companies in debt of the future contracts they have agreed to.

As a result of this, the prices of final oil products are largely determined by the ease of extraction and production. So if production is disrupted, the price increases drastically. In the case of the Middle East, disruptions come in the form of conflicts between and within governmental bodies. Political unrest and societal turmoil, and its effect on oil prices can be seen throughout history. For example, sharp increases in cost per barrel can be seen around early 2011, mid 2012, and late 2013 – corresponding to the first Arab Spring uprising in Tunisia and Egypt, the second Arab Spring uprising in Libya and Syria, and international sanctions and pressure on Iran, respectively. See the chart below:

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Having established that international and local political instability within the Middle East are key forms of disruption to the oil production process, and therefore key elements in shaping the global price of oil, the question arises as to what causes such instability. These short-term cycles of conflict are recurring, and repeatedly generate increases and decreases in international commodity markets. So why do they continuously occur? Some theorists attribute these conflicts and instability to extreme population growth – such as the population of the Middle East and North Africa growing from 127 to 569 million between 1970 and 2012. Along with such growth come increased public requirements and demands, which must be met in order to maintain political consistency. Essentially, a high oil price enables countries within the Middle East to keep a stable political system. These short-term cycles of violent conflict repeatedly come when the baseline price of oil has dropped too low, and are triggered by societal unrest. In a sort of reflexive system, the conflict decreases accessibility to the oil, sharply increasing the price, thereby allowing for the next phase of the cycle.

In conclusion, the political and economic landscape of the Middle East is directly reflected in the shifting of international oil prices. The determining of these prices is dependent on accessibility to production, which is defined by the societal situation in these countries, and occurs in short-term repeating cycles. As the unrest within the area is quelled, the price of oil drops, more buyers purchase oil and international demand increases. This increase in demand, along with abundance of production, means that the price will eventually begin to decline, triggering more unrest which will disrupt the system of production and thereby begin the cycle again. Two examples of this cycle have occurred in 2013 already – with the international sanctions on Iran and Organization of the Petroleum Exporting Countries (OPEC) cutting supply, both drastically affecting the price. Analysts have predicted that oil prices will hover around a baseline of US$85 for a while, and are unlikely to drop below US$80 with social sentiments of revolutions and uprisings still making their way around the Middle East.

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