Barrel traders recently pushed the price of West Texas Intermediate (WTI) oil above $US 55; the first time in over two years.
Scarcity doesn’t really justify the upward price movement. There isn’t a shortage of oil in the world. But there could be, in the worst case, if missiles start flying between two of the world’s largest oil players: Saudi Arabia and Iran.
Maybe it won’t happen. But maybe it will. And that’s what the “geopolitical risk premium” is all about. It’s an anxiety surcharge that’s tacked onto every barrel of oil, in fear of supply disruption on a moment’s notice. And the fear is back.
After three years of naivety we’re back to acknowledging the known unknowns of the Middle East, the uncertainties that strap a 10-to-20 percent premium on the price of a barrel.
Paying a risk premium for oil is nothing new. It’s been around for decades and has gone up and down with the hostility thermometer of the Middle East.
Unusually, the pricing of risk dropped to zero around 2015. Three main reasons prompted a sense of world peace: the promise of the Iranian nuclear deal; a feeling that booming oilfields in Texas could offset any disruption; and a growing surplus of oil inventories in storage tanks around the world.
Of late, the notion of oil obsolescence has also perpetuated a feeling of nonchalance. “Who cares about the Middle East and their oil?” has been a question driven by the utopian narrative: “I’m not worried, everyone will be driving electric cars in a few years anyway.”
But it’s all been a false sense of security.
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