Effects of Turmoil in the Arab World

Overview

While it remains the top source of energy, oil has fallen off its pedestal since the energy shocks of the 1970s and 1980s, which proved how reliant the developed world had become on petroleum products, and how vulnerable it was to shortfalls in supplies.

In 1973, oil accounted for 46 percent of the world’s total energy consumption; by 2005, its share had declined to 35 percent. But oil remains well ahead of other energy sources: coal meets 25 percent of the world’s energy needs, natural gas is next with a market share of 20 percent, and nuclear power meets 6 percent of the planet’s energy needs.

Besides price volatility, concerns about energy security, as well as the environment and the threat of global warming, have put oil’s position under pressure. There are also concerns about the effects of instability in the Arab world.

Effects of Turmoil in the Arab World

In 2011, events unfolding in the Arab world, the epicenter of global oil production, have been a sobering reminder that trading in oil, that mother of all commodities, is at heart a political game.

In December, OPEC agreed to increase its production target for the first time in three years in a move that appeared to signal that Saudi Arabia and Iran had put aside their differences on oil policy for the time being.

In the few years prior to the December meeting, OPEC’s 12 members had increasingly followed their own production and export policies. Saudi Arabia ramped up its production in early 2011, when the outbreak of revolution in Libya halted 1.3 million barrels a day of exports.

Saudi Arabia, which produces about a third of OPEC’s total production and is the only member with significant spare capacity, had been working hard behind the scenes to restore the organization’s credibility after a meeting in June 2011 ended with no agreement.

Iranian representatives appeared to be in no mood to challenge the Saudis in December, despite rising tensions between the two countries over the Saudi military intervention in Bahrain and allegations of an Iranian-backed plan to assassinate the Saudi ambassador to the United States.

The new quota does not set targets for individual members. But the total production target includes Iraq and Libya, two countries expected to ramp up production.

Iran, which held the rotating presidency of OPEC in 2011, proposed that Iraq hold the seat in 2012. The ministers agreed, signaling that Iraq would again be a major player in the organization for the first time since the United States-led invasion and toppling of Saddam Hussein in 2003.

Few oil experts were surprised that the unrest has unnerved the market. The world is thirsty for oil, and supply and demand are in delicate balance. There is little room for more disruptions in supplies. Indeed, spare capacity — essentially that amount of extra oil that OPEC members are able to produce in a pinch — is now about five million barrels a day. That is about 6 percent of the oil that the world consumes every day. That cushion is greater than in 2008, when it equaled about 2 percent of daily consumption, but it remains worryingly thin.

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