Tensions are rising in Iraq again, and oil prices are heating up as well.
The common pattern is repeating itself again. The rapid increase in domestic oil production has helped minimize some of the typical effects, but oil is still a global commodity heavily influenced by geopolitical issues.
Global oil production last year was about 90.3 million barrels per day, while consumption was about 88.2 million barrels per day, according to the U.S. Energy Information Administration. That’s a very thin margin. Iraq has the fifth-largest proven oil reserve in the world and produced about 3 million barrels per day last year. If that oil is removed from the global market, there could be supply disruptions.
So far, most of the country’s oil producing and refineries have been unaffected. But oil is priced on the open market, which often jumps on fear and rumor.
The fear of instability and possible disruptions has caused an increase in the global price of oil, which is known as Brent Crude and is priced in London. Brent is the benchmark price, and it affects other oil and gasoline prices.
Brent closed at $114.91 Thursday, up from $108.61 on June 6. The longer the unrest continues, the more the price is likely to go up.
That’s the global picture.
Domestic production jumped to about 8.2 million barrels per day in March, up from 5 million barrels per day in 2008, and it continues to grow.
Largely because of the rapid boost in production in the central United States, West Texas Intermediate crude priced in Cushing has been trading at a discount to the international price. WTI closed at $106.62 Thursday.
Oil companies don’t set the price of oil. If they did, the price would never have dropped below $30 like it did for more than a decade, and domestic oil wouldn’t trade at such a discount.
U.S. production has helped offset declines in other parts of the world. Late last year, the United States and its allies imposed heavy restrictions on Iran, including on its ability to export oil. Such sanctions would not have been possible just five years ago. The United States effectively took Iran’s production out of the global market without causing oil prices to spike significantly. Prices went up, but not like they would have without increased U.S. production. Now the issues in Iraq are adding to the supply issue.
The bottom line is that despite the supply disruptions in the Middle East, there is plenty of oil in North America. Because of the domestic oil boom, we are not in danger of shortages like the country experienced in the 1970s. But because oil is a global commodity priced in London, any supply disruption — or even the fear of a possible disruption — likely will drive prices higher.