Stocks spent Wednesday morning recuperating some of the week’s losses, but events in Syria, Egypt and Libya sent the price of West Texas Intermediate crude to a two-year high at just shy of $110 per barrel, while Brent Crude clambered over its own six-month high to more than $117 per barrel.
Though Libya is known for its large reserves of a particularly light and sweet variety of crude, Syria and Egypt are not major exporters of any kind of energy resource, and indeed have little in the way of their own proven reserves. Investors are worried about the overall consequences of escalating tensions in Egypt, where last month’s military coup has led to violent and deadly clashes with over 1,000 dead, while the Obama administration's apparent willingness to finally “do something” about the Syrian regime’s alleged use of chemical weapons threatens to overtly drag the US into another Middle Eastern conflict.
There is no shortage of unpalatable scenarios that could result directly and/or indirectly from both situations, all of which will probably drive up the price of oil. Since the 1979 Camp David accords when Egypt broke from the Arab fold to make its own peace deal with Israel, the country has been a cornerstone of the regional security architecture. The country has maintained calm on its sensitive Eastern border for over three decades that lasted until the last three years, during which militant actors have sought to exploit the chaos and uncertainty to conduct attacks on both the military, as well as raids across the Israeli border.
The Syrian situation, for its part, has been more or less out of control from the beginning. Though almost invariably opposed to US policies in its neighborhood, Syria has been a major player in the regional security framework. Even during the brutal civil war years in Lebanon in which Syrian troops fought directly against IDF soldiers, the country showed its willingness to avoid any sort of chaos on its own border with Israel. Now that some sort of US attack on the regime’s defenses is all but certain, there is a palpable sense of fear about which direction (or directions) the fallout from such a scenario could take.
Hostilities have already shaken the fragile peace of Lebanon, and the outflow of refugees is putting pressure on neighboring Turkey and Jordan. There is also fear that a US strike would ultimately empower the regime’s brutal, al-Qaeda-affiliated Islamist opponents, who have already received considerable support from Sunni rebels across the border in Iraq (where the situation is also becoming increasingly precarious).
Any one of these possibilities, or what would more likely turn out to be a volatile combination of them, could send the price of oil much higher. Indeed, Societe Generale SA (GLE) said on Wednesday that Brent crude could touch $125 per barrel in the coming days, on its way to a brief stint at $150 per barrel. While the Saudis could make up for some of the production shortfall, that could cut output by up to 2 million barrels a day, analysts at Societe are most concerned about the consequences of Iraq getting dragged further into the Syrian quagmire, greatly exacerbating tensions.
But while this may be good for oil companies in terms of profits, higher prices are ultimately likely to throw yet another obstacle in the way of an already struggling US economic recovery.
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