EMC Working Papers

Crude oil is one of the hardest markets to predict because there are so many conflicting crosscurrents that affect its price including supply and demand, the health of the global economy, geopolitics and the global monetary and regulatory environment. Whenever a conflict occurs in an oil-producing country, oil prices rise. It's one of the most predictable patterns in the markets. In the short term, two major geopolitical developments could impact immediately and very adversely on the oil price: one is a deterioration of the situation in Iraq affecting its oil infrastructure and production and the second is an escalation of the Russia-Ukraine conflict causing a disruption in Russian oil and gas supplies to the European Union (EU). In the long term, however, the real threat to global oil supplies and the price of oil comes from the steeply-rising domestic oil consumption in the Arab Gulf countries and a lack of diversification of their economies. This paper will argue that a disruption of Iraq's oil production could push oil prices to more than $140/barrel whilst any disruption of Russian oil supplies to the EU could easily add $20-$30 to the price of oil. It will also argue that failure by the Arab Gulf countries to curb their domestic oil consumption drastically or replace oil by nuclear power and solar energy in electricity generation and water desalination, would probably result in the complete collapse of their oil exports by 2032. This could send oil prices rocketing to $200-$250/barrel.

Key Words: Oil, Iraq, Ukraine, Arab Gulf, geopolitics, price volatility, tight oil.