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Three wars in Iraq and their impact on oil prices

One of the puzzles of plummeting oil prices is that crude has fallen even as war in Iraq has erupted again


 
Reuters

Reuters

One of the puzzles of plummeting oil prices is that crude has kept falling, even as the U.S. and other nations have gone to war, again, in Iraq (and Syria). Given the inherent risk to supplies posed by the rapid spread of Islamic State militants and the ensuing allied air strikes, one might assume oil prices should be rising. Iraq is the world’s eighth-largest oil producer, and its output last year, of three million barrels per day, was at the highest level it’s been since at least the 1980s. The fact that the price of oil is instead going the other way is seen as a sign of underlying weakness in the petroleum market, reflecting a growing supply glut and falling demand. I touched on that point in a recent column.

But, as it turns out, war in Iraq, on its own, at least, tells us little about where oil prices might be headed. Granted (and thankfully), we have a limited data sample—the Gulf War in 1990, the invasion of Iraq in 2003 and this latest conflict—but, as the chart below shows, in the three months leading up to the start of the previous two conflicts, and the three months following, oil prices reacted far differently.

3 wars in Iraq and the impact on oil prices

So far, the response of oil prices to the ongoing conflict in Iraq and Syria looks more like 2003 than 1990. It could be that the world is becoming desensitized to conflict in the region. Six months is also an admittedly limited time frame, though I kept it at that to try to isolate the immediate impact of the conflicts.At this point, the allied effort has mostly been confined to aerial bombardments; the number of troops on the ground is still very small, so the comparison to the previous two wars is not perfect.

Of course, the price of oil at any one time reflects countless factors. The fight with Islamic State militants is just one. If prices keep falling, this conflict will be just one part of the explanation why.


 
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Three wars in Iraq and their impact on oil prices

  1. Ya, but, but, but, I thought that’s what our (2nd Largest Oil Deposits on planet Earth), aka Alberta Oilsands was supposed to offset.?
    Even, if not for all of North America, by ‘da geezus, atleast let it be so for Canadians, who’re paying tooth-n-nail, via Harperian taxes, for these ridiculously high prices even at our Gas pumps still ???
    In other words, it’s not enough, you and your Andrew Leach’s can all take a long walk off a short pier.

    Where are the savings for us retail taxpaying canadian comsumers, down the road, hello ?

  2. ya but, but, but, the Canadian consumer/taxpayers should be paying a lot less than these outrageous gas prices at the pumps still. hello ?
    Apparently, we have the 2nd largest Oil supply in the world, aka Alberta Oilsands. You sure wouldn’t know it, living in Canada.
    The “Harperian” lobbyists way of dealing with all this is almost treasonous.
    How ’bout you, and your Andrew Leach(ers), ALL take a long walk off a short pier.

  3. The conflict and instability in Iraq goes back much further than this year. I suspect the instability has already been priced in. A bigger factor might be the risk of conflict with Iran over its nuclear program, which was driving up prices for the past few years. That issue seems to have receded in recent months for reasons associated with the rise of ISIL: the West is distracted with other issues, tensions with Russia have reduced the scope for international cooperation, Iran is regarded in some quarters as a potential ally against ISIL, and the new Iranian president has been trying to improve Iran’s relations with other countries.

    I also notice that your chart normalizes oil price to its level before each conflict. That may be too simplistic: oil was relatively cheap with respect to other commodities in 1990/91, and a large price increase could be absorbed by the economy without inducing a lot of pain. Likewise, oil prices were significantly lower in 2003 with respect to the broader economy. Today, oil is already at a very high price and the world economy is still weak after the 2008 crash. Further increases in prices can’t be supported by the economy, so reductions in demand offset upward pressure on prices.

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