When it comes to oil prices, speculators often take news concerning the Middle East very seriously and make decisions based on it. However, prices in the long run are supply- demand driven and the emergence of new producers is likely to turn the attention of investors towards economic fundamentals rather than the politics when deciding on long term trends.

Recently the Argentina’s decisions to nationalize YPF have been met with broad media attention and condemnation from most governments. When Hugo Chavez nationalized oil companies in Venezuela In 2007, the media and international community reacted similarly. However, both these cases witnessed no supply disruption despite the political rhetoric. 

Looking at a fairly recent example; when NATO launched their campaign against the Gaddafi regime in Libya, oil production came to a standstill in the country and crude oil prices rose to a two and a half year peak in April 2011. Libya produced 1.6m barrels of crude oil a day which is approximately only around 2% of the world’s daily consumption (based on 2009 stats, daily consumption stood at 84.3mb/day). Although creating an initial panic, prices soon went back to the pre-war level by August 2011. The Iraq war had a similar buildup with analysts predicting sky rocketing prices, but the reality delivering a somewhat sober picture with small price fluctuations that were offset by increased production within OPEC and elsewhere. Thus, problems in the Middle East do not necessarily imply major price increases.

Two major factors have changed the dynamics of oil prices. Firstly, Russia has emerged as the new leading producer of crude oil with production overtaking Saudi Arabia. Both Russia and Saudi Arabia produce well below their limit and are thus able to take advantage of any price increase, due to a shortage by increasing their production. Secondly, thanks to the explosive growth in the emerging markets, demand for oil has risen so drastically that the days of cheap oil are over. With the new equilibrium price hovering around the three digits mark, it suddenly makes economic sense to tap into reserves that were previously unfeasible. This is especially true for nations such as United States, Canada and Russia that have very large un-tapped reserves as shale oil, in the arctic region and off shore reserves.

The next few years will probably thus witness high price levels, but fewer long term trends in the price of oil which is likely to hover around $100. With more producers finally catching up, OPEC will not be able to have monopoly control over prices, nor does it make sense for them to sell cheap especially when demand is projected to grow. However, the addition of new suppliers is likely to reduce volatility based on Middle East politics.

Note: The views mentioned are the sole opinion of the author. The author will take no responsibility for any adverse consequences resulting from using the opinions stated in the article.