It has been a tumultuous week for oil traders and sovereign nations as the price of Brent oil hiked up 13% over the past few weeks to end up at $125. However, more than the prices being driven by speculative means of whether an Iranian war would take place, there is a supply side shock and economic activity to be contemplated that has led to meteoric rise of oil prices.
Supply disruptions from Sudan, Yemen and Syria have caused a 700m bpd deficient of oil production in the world market. Sanctions placed in Iran, in view of its controversial nuclear program, have led countries and oil companies, particularly those in Europe and U.S and to a lesser extent Brazil, China and India, to stop buying oil from Iran thereby creating a lacunae in the physical trading of oil. These facts have contributed to a correction of oil prices which will tend to have its effect on global market but whether its effect will be as same as the phenomeon of oil crisis in the 1970’s is yet to be seen.
If one considers the total consumption of oil by the sovereign nations and measure it against the overall GDP, the figures (Oil Burden Report by Soc Gen) are a revelation on the impact this new risk event will have on the world economy.
Europe seems to be insulated by the price impact mainly due to its energy policies that have allowed it to be less dependent on crude oil inputs. On the other hand, in spite of high oil consumption, China provides a highly subsidized rate that protects the consumer surplus of oil from the fluctuations of prices in world market. The impact can look to be severe in U.S with a potential of national debate and the issue taking a political turn.
