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Nigerian Federalism Bad: Oil Shocks Internals

Instability in Nigeria creates the perception that the oil supply is shrinking – this increases the oil prices – an independent oil analyst Williams concludes

Republican Herald, January 7, 2008

[David Falchek, “Availability proves issue for crude oil” http://www.republicanherald.com/site/news.cfm?newsid=19174200&BRD=2626&PAG=461&dept_id=532624&rfi=6]

When you fill up your tank, you aren’t just paying for gasoline. You also are paying for greed and fear in the global petroleum market.With continued instability in the Middle East and in oil-producing countries of Africa, oil supplies could be easily disrupted at any time. That produces what oil traders call a “risk premium,” an extra price tacked on to the barrel price of oil futures. In fact, violence in Nigeria helped give crude oil its final push over $100 a barrel Wednesday. Bands of armed men invaded Port Harcourt, the center of Nigeria’s oil industry, attacking two police stations and raiding the lobby of a major hotel. When political disruptions seem to threaten stability in oil-producing counties, buyers rush to get their orders in before a potential supply crunch or price spike. That drives up the price of oil immediately, even if nothing terrible actually happens overseas. The price of fear. No one can say for sure how much of oil’s record run to $100 a barrel is due to market speculation. But where there’s risk, there’s speculation, said James L. Williams, an independent oil analyst from WRTG Economics. In his view, oil prices aren’t climbing because our demand exceeds supply. There is still more oil than needed that sits in tapped wells ready to be pumped, but the cushion of excess capacity is thin and shrinking. During the oil glut in the 1990s there were 6 million barrels per day of excess capacity, more than enough to keep oil flowing should there be supply disruptions. Today, excess capacity is only 1.7 million barrels. “When you only have 1 or 2 million barrels around, it’s what you can’t do that adds to the price,” Williams said. “We can’t replace Nigerian production if it goes offline. If there’s a revolution in Venezuela, we don’t have enough to make up for it. We can’t make up Iran, either.” All those “what ifs” lead to fear. That fragile balance, where production barely meets the world’s demands, sent oil prices up, Williams said. He calculates that about $30 per barrel of “supply/risk premium” is built into today’s record prices.

The perception of political instability in Nigeria triggers shocks

Washington Post, July 14, 2006

[Steven Mufson, “A Price Inflamed By Fear, Up to a Third of Oil’s Stunning Ascent Traces to Psychology” http://www.washingtonpost.com/wp-dyn/content/article/2006/07/13/AR2006071301686_2.html]

Add this to the costs of political instability and violence around the world: The price of crude oil hit a record yesterday, topping $76 a barrel. Oil prices rose as fighting spread in Lebanon, the standoff continued over Iran's nuclear program and a Nigerian newspaper reported that explosions had rocked two pipelines in the West African nation. Although supplies of oil were virtually unaffected, traders and analysts said anxiety about political violence and tension around the world had once again driven up the "political premium" for oil.

Nigerian Federalism Bad: Oil Shocks Internals

Unrest in Nigeria triggers shocks

The Australian, January 4, 2008

[“OPEX under pressure as oil price spikes” http://www.theaustralian.news.com.au/story/0,25197,23005586-36418,00.html]

THE oil producing cartel OPEC will face enormous pressure to help calm the crude market at its next meeting in February after prices struck the symbolic $US100 level, analysts said. "It (the $US100 record) will be a psychological trigger for consumer countries,'' said global head of commodities at investment bank Societe Generale Frederic Lasserre. "We will see governments putting pressure on OPEC, saying 'we need you to do something for us'. In the end though, they (governments) probably share the view that adding a few barrels will not change the market.'' The 13-member Organisation of Petroleum Exporting Countries shrugged off demands at its last meeting in December, despite a public plea from US Energy Secretary Samuel Bodman for an output increase. The Saudi-led cartel pumps about 40 per cent of world oil supplies but restricts the output of its members through a quota system that is reviewed at regular meetings. London-based analyst John Hall, who runs his own oil consultancy, John Hall Associates, sees OPEC bowing to pressure and making a gesture at the extraordinary meeting in Vienna on February 1. "I was convinced that they were going to increase output in December. I'm confident they are going to do it this coming month,'' he said. "Maybe they can talk the thing up though (the possibility of an increase) and the market will come down. Then they won't need to do it,'' he said. OPEC, which declined to make anyone available for interview when contacted by AFP, insists that prices are being driven by speculative buying and that increasing supplies would not have an impact on the market. "For now the cartel's view is that underlying supply and demand conditions are nowhere near as tight as record oil prices would suggest,'' said Julian Jessop, chief international economist at research group Capital Economics. "But if oil prices are still around $US100 per barrel in the run-up to the next OPEC meeting on February 1, we would expect quotas to be raised again.'' The last raise was in September when US ally Saudi Arabia pushed through an increase of 500,000 barrels per day (bpd) in the face of reluctance from fellow members, mainly anti-US bloc Venezuela and Iran. Lasserre sees another increase of 500,000 bpd in February, which will formalise current production over the output quota and add a bit to the market. Analysts agree that a number of factors driving oil prices higher are outside of OPEC's control, mainly buying by investment funds, the weaker US dollar, unrest in crude producer Nigeria and instability in Pakistan. But some do lay blame at the cartel's door for the more than 50-per cent increase in prices over 2007. "OPEC has not been pumping enough. It's as simple as that,'' an analyst at the Centre for Global Energy Studies, Leo Drollas, told AFP, referring to output cuts sanctioned by the cartel at the end of 2006.

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