Mounting Risks of a Spike in Oil Prices

In Nigeria a four-day national strike has caused chaos around the country, and threatens to disrupt oil exports.  This event is poorly timed for consumers, as tensions continue to mount in Iran.  The probability of a sudden spike in oil prices is increasing, and oil markets reflect it already this morning with West Texas oil climbing to $102.87.

Many of the poorest Nigerians have been on strike to protest the government’s removal of gasoline and diesel subsidies.  In effect the removal of subsidies have cause gas prices to double there.  Oil workers’ unions are organizing and threatening a complete shutdown of crude production.

Nigeria is the world’s third largest oil producer.  The U.S. imported 1.02 million barrels from Nigeria, in 2010 per the U.S. Department of Energy. From Nigeria alone we received 10.9% of the 9.3 million barrels we imported daily that year based on data from the United States Department of Commerce.

There is little elasticity in oil supply and demand price dynamics.  In other words, a small reduction in supply, or a small increase in demand leads to a proportionally greater change in prices.  This is often observed with essential commodities, that lack alternatives and is the basis of one of the fundamental theories of economics.

Fortunately, the probability of a worse case scenario, where all of Nigeria’s exports are affected, is low.  However potentially losing 10.9% of our total imports is a significant risk, and we need to keep in mind that problems are not limited to Nigeria.

Global oil production is already strained due to sanctions against Iran.  Iran has threatened to close the Straights of Hormuz, and the U.S. is tightening the noose.  This morning we learn that there are now two U.S. aircraft carriers in the Arabian Sea.  According to the U.S. Navy carrier CVN-70 Carl Vinson arrived on January 9th just off the Straits of Hormuz, joining the carrier CVN-74 John C. Stennis.  This presents all kinds of opportunities for China to continue testing their technologies using Iran as a proxy, and all kinds of risks elsewhere.

Looking into 2012 and beyond, we have to ask ourselves what the chances are that an escalation of tensions will cause a sudden spike in oil prices.  As consumers were need to be asking ourselves what we can do to reduce our exposure to rising gas prices.  As investors we need to look at each holding’s ability to sustain revenues when faced with increased input costs.  We could be looking at the risk/reward prospects of various oil service companies.

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About sandiachris

I love the diverse people and cultures in the United States and especially New Mexico & Colorado. I enjoy exploring new trails, as the South West USA is amazing. I'm a small business owner and software developer. I've taught economics, built computers, vegetable oil powered cars, software, and like to write about things that could make our lives more meaningful, pleasant and less stressful.
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