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With much of the media focus over recent weeks on the political crisis in Ukraine and EU and US sanctions against Russia, Europe’s future energy security seems further adrift than ever.
But Europe’s biggest problem isn’t this winter’s gas supplies; it is our economy’s continued reliance on imported fossil fuels – oil in particular. Some of the most important dynamics affecting oil markets today are happening in the Middle East.
For those of us following energy markets closely, news of political turmoil in the Middle East are a familiar part of our work. But the past few years have been rather exceptional. It’s not just the increasingly diverse sources of regional and domestic conflict in the area and the rising number of Middle Eastern oil and gas producers that are unprecedented, but how the oil markets have responded to conflict.
Losses from Libya and from Iran under intensified sanctions since mid-2012 have so far accounted for the largest portion of supply disruptions from the region over the past two years, with smaller additional losses from Iraq, Yemen and Sudan, and war-torn Syria. Add to that future losses through lagging investment today, and we’re storing up a problem.
The remarkable levels of price stability for crude oil along the world’s most important benchmarks, in the face of large disruptions in supply from some of the Middle East’s key suppliers, have left many observers somewhat stunned. Oil markets have proven themselves to be remarkably resilient.
But this is not a good time to “chill out about oil prices”. One of the key underlying factors in that resilience – the surge in new oil supply from fracking fields and oil sands in North America – has left the market in an unsettling sense of false security, fostered by proponents who believe the US will become the “new Middle East”. But the balance we are seeing is, naturally, a fragile one.
One of the oil market’s longest known uncertainties, that of a match between projected demand and supply for oil, is today more uncertain than ever. Global supply outlooks remain heavily optimistic on the US ability to deliver over the coming decade, relying overwhelmingly on unconventional plays for what looks like a historical supply surge for more years to come.
Worryingly, these optimistic forecasts flow into investment decisions made by alternative energy producers. The decisions over where and whether to invest by oil market heavyweight Saudi Arabia, and also medium-sized producers such as Kuwait and the UAE, are important drivers of tomorrow’s oil prices. These countries are already facing uncertainty from within their own region; after all, we don’t yet know how much more oil we can expect to be exported from Libya, Iran or Iraq.
Assuming we are getting things wrong, we may see higher oil prices – not just tomorrow but for the weeks and years afterwards. This means higher energy prices in the UK, in Europe and in other Western consumer markets leading to higher living costs, higher rates of inflation, and a potential drain on our economy. By then, even a surge in new European gas supplies will not help us.
Laura El-Katiri is a research fellow at the Oxford Institute for Energy Studies and a teaching fellow in the department of financial and management studies at the School of Oriental and African Studies, University of London.
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This article is part of the Guardian’s #bigenergydebate series. Click here to find out more about this project and our partners.
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