Gaza crisis boosts oil prices
(MoneyWatch) Although the fighting in the Gaza Strip has yet to affect global oil production, anxiety that the could conflict could spread has driven energy traders to bid up the price of crude in recent days. A wider war in the region is the nightmare scenario for the global economy, with experts saying it could boost Brent crude prices from their current level of roughly $110 per barrel to upwards of $200 per barrel, by some estimates.
According to Capital Economics, unrest in the Middle East since the "Arab Spring" kicked off last year has added $5 to $20 per barrel to the total cost of Brent crude. "In the last few days it [the Middle East instability premium] has increased from less than $10 to more than $15," the research firm said in a recent report. "In other words, had it not been for the additional uncertainty created by the Gaza crisis, oil prices might be at least $5 lower than they are today."
If Iran became directly involved in the conflict, the commercial viability of the Strait of Hormuz, through which around 20 percent of the world's oil still flows, would come under threat. That would require other oil-producing nations to boost supplies, and in the U.S. there would likely be calls for President Barack Obama to stem any rise in the price of gas by tapping the Strategic Petroleum Reserve, which is meant for emergency supply disruptions.
But in the short-term, oil prices would likely spike, which would have a negative impact on the U.S. economy. Over the past 40 years, rising energy prices have contributed to multiple recessions around the world. The Arab oil embargo in 1973, Iranian revolution in 1978-79, and Iraq's invasion of Kuwait in 1990 all resulted in sharp hikes in energy costs and slowed the economy.
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Prior to this latest bout of Middle East turmoil, energy prices have generally been falling around the world. The reason is simple: with the global economy slowing, overall energy consumption has decreased. According to economist Ed Yardeni, demand from "Old World" economies remained around 16-year lows in the 12 months ending October, with falling usage in the U.S. and Europe offset by rising demand in Japan.
By contrast, oil demand in China, India, OPEC and most countries in Latin America remains fairly robust. Oil consumption in the U.S. and EU account for 33 million barrels a day, which still dwarfs consumption in China, at 9.4 million barrels, India (3.2 million) and Russia (2.2 million).
If the ongoing truce talks involving Israeli, Palestinian, U.S. and other officials in the region succeed in ending the clash, crude prices should trend lower. Oil prices fell today amid signs that the sides could soon halt the fighting. After yesterday reaching its highest point in nearly a month, benchmark crude declined 68 cents to $88.60 Tuesday morning.
That could provide an important boost for the U.S. economy. The cost of oil is the largest contributor to prices at the pumps. If futures markets calm down, experts are hopeful that the national average for a gallon of regular gas will continue toward $3.25 by year-end. According to the AAA fuel gauge, the price for a gallon is $3.41, down 28 cents from a month ago.
Here's a breakdown of the different price components in $1 of gas as of September 2012, according to the Energy Information Administration:
- Crude oil: 62 cents
- Refining costs and profits: 18 cents
- Taxes: 11 cents
- Distribution and Marketing: 9 cents