Business Blog: Hoover’s Business Insight Zone

These days, breaking news that has any geopolitical angle is apt to set off fluctuations in the market for crude oil futures. Oil supplies are tight worldwide, and in recent years there has been ever more speculation in the oil-futures markets, not just by traditional oil traders, but by hedge funds and other financial outfits looking for diversified asset classes to hold.

As I write this, oil futures are $96.15 per barrel, and there are no shortage of headlines tying the price surge to the assassination of former Pakistani prime minister Benazir Bhutto. (Details on her death here.) An example:

Crude rises above $96 on news of Bhutto’s death
By Polya Lesova, MarketWatch

Crude-oil futures rose above $96 a barrel on Thursday, as news of the assassination of former Pakistani Prime Minister Benazir Bhutto rekindled concerns about rising tensions in the Middle East.

This comes on top of yesterday’s news about Turkish air strikes on Kurdish bases across the Turkish-Iraqi border:

Oil Rises After Report Turkey Attacked Kurdish Rebels in Iraq

Dec. 26 (Bloomberg) — Crude oil rose for a third day in New York on concern shipments from Iraq may be disrupted after the Turkish military attacked bases of Kurdish rebels in northern Iraq.

Oil prognosticators have spent zillions of column inches trying to explain the complex forces affecting oil prices. One of the major divides for petroleum-watchers separates those who credit long-term price trends to above-ground or below-ground forces. The below-grounders include the various subsets of the Peak Oil community, whose members generally agree that the world is running short on new oil supplies simply because we have already tapped the biggest and best pools of oil in the century and a half that we’ve been looking.

The above-grounders, led by prominent oil expert Daniel Yergin and his Cambridge Energy Research Associates firm, argue that the world still enjoys ample petroleum reserves below the ground, but that we can expect more above-ground problems — e.g. unrest in Pakistan and Kurdistan — to keep prices high.

These days, there seems to be plenty of fodder for both camps. Oil supplies remain tighter than one would expect, given that prices have been this high for this long; this would seem to support the idea that readily expoitable reserves are hard to come by. Then again, the many, many geopolitical complications that have beset oil-producing regions (Iraq, Iran, Pakistan, Venezuela, Nigeria, . . .) during this decade would likely keep prices high even with plenty of reserves in the ground.

Time will tell which of these arguments holds more weight. For now, we can expect prices to stay at levels we’ve never seen, and we can expect every piece of bad news coming from any oil-producing country to drive them still higher.  For better and for worse, we are living in very interesting times on the oil front.