Iraq's Crisis Should Make Us Thankful For America's Oil Boom

June 21:


Iraqi troops stand in hold their weapons as they arrive to support the Sunni anti-Al-Qaeda militia Sahwa (Awakening) in its fight against anti-government militants.

So far, oil markets have mostly shrugged off the turmoil in Iraq. The world’s seventh largest crude producer is tearing apart at the seams thanks to sectarian violence, yet the cost of a barrel is up just 5 percent this month—a bump, sure, but not a crisis.

Why the mere blip? The most important reason prices haven’t surged is straightforward enough: As of now, Iraq’s oil production isn’t in serious danger. Fighting has been contained to the country’s north, while drilling is concentrated in its south. “Not a single barrel of crude exports has been lost since the Islamic State of Iraq and the Levant (known as Isis) routed Iraqi security forces,” notes the Financial Times.  

But the quiet response is also a sign of something bigger. It’s a subtle demonstration of how North America’s fracking-fueled oil boom is paying dividends by making the world market more resilient.

Energy traders always add a fear premium onto oil. When instability (a raging civil war, for instance) hits a major petro-producer, prices race up, as buyers start to fret about potential nightmare scenarios that would cut off their supply. In the case of Iraq, that might mean attacks on pipelines or export facilities, since few expect Baghdad to actually fall.*

Those sorts of worries are why prices have risen at all. But they’ve been balanced out by the fact that, at the moment, the world has a decent cushion of oil. “There are cargoes of Angolan and Nigerian crude that nobody wants,” Edward Morse, head of commodities research at Citigroup, told CNBC. Iraq’s conflict hasn’t dealt a blow to the world’s oil supply yet, but we have a bit of protection if it does.

And for that, we can largely thank the U.S. fracking revolution. Since 2010, when drilling began to recover from its recession-induced drop, the world has addedroughly 2.6 million barrels a day to production. As it happens, the United States alone has added about 2.5 million barrels a day. We’re not the only country to dramatically increase output—the world’s supply would have increased more if some nations, like Libya and Syria, hadn’t cut back—but our oil is nearly equal to the entire margin of growth.

Or, to put it another way, we're a big part of the globe's cushion. Were it not for the U.S. drilling revival, the market would be far less equipped to deal with even small disruptions, much less something catastrophic. You can be certain the fear premium traders have priced in today would be higher than 5 percent. And the economic pressure for Washington to swoop into Iraq to maintain order would be stronger.

This is the benefit of diversifying the world’s crude supplies away from conflict zones like the Middle East. The best longterm way to insulate ourselves from the ups and downs of the oil market is to simply cut consumption. But that takes time. In the meanwhile, the more production that comes from North Dakota, or Canada, or Brazil, the less we need to fear when problems loom in a country like Iraq—which makes us all better off.  

*Footnote: If it did, and the country’s entire oil output disappeared, some believe it could add $40 or $50 to the price of a barrel. In that case, we’d be in the zone where economists start worrying about oil-induced recessions.

Source: http://www.slate.com/blogs/moneybox/2014/06/21/iraq_and_oil_the_country_s_crisis_should_make_us_thankful_for_america_s.html?