Eco­nomic reper­cus­sions of war in Iraq

Financial Mirror (Cyprus) - - FRONT PAGE -

Oil, whether we like it or not, re­mains a pri­mary fuel for eco­nomic growth and sus­tain­abil­ity. It is dis­qui­et­ing but hardly sur­pris­ing that con­cerns about Iraq head­ing to­wards civil war, de­spite the coun­try’s main oil fields cur­rently be­ing un­af­fected, have al­ready cre­ated shock­waves across the global econ­omy and pushed the oil price to nine months highs.

Why so? Iraq is the world’s eighth-largest oil pro­ducer and the sec­ond-largest pro­ducer in the Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries be­hind Saudi Ara­bia.

Its long-term im­por­tance for the global en­ergy mar­ket can­not be un­der­stated.

Ac­cord­ing to the In­ter­na­tional En­ergy Agency, Iraq will be re­spon­si­ble for around 60% of the growth in OPEC’s pro­duc­tion of crude oil in the re­main­der of this decade.

As Sunni-led rebel fighters ad­vance on towns in the north and east of Iraq, it is not yet the case that the vi­o­lence poses a di­rect risk to the main oil sup­plies in the south or to long-term oil in­vestors.

How­ever, sen­ti­ment rules

the

mar­kets. Mar­ket vo­latil­ity is a nat­u­ral con­se­quence of the un­cer­tain po­lit­i­cal and mil­i­tary hori­zons.

A key worry is that the Sunni mil­i­tants could ad­vance south­wards to­wards the Shi­ite con­trolled Bagh­dad and the main oil fields. Iran has al­ready of­fered help to its fel­low Shi­ites in govern­ment, prompt­ing spec­u­la­tion that the chaos could spi­ral across the Mid­dle East.

On Thurs­day, U.S. Pres­i­dent Barack Obama pledged to con­sider “all op­tions” in­clud­ing air strikes. On Fri­day, how­ever, he in­di­cated that the US will not take any im­me­di­ate mil­i­tary ac­tion to as­sist the Iraqi army against the mil­i­tants.

Obama’s com­ments were too late to calm the mar­kets. Brent crude reached 114.69 dol­lars on Fri­day due to the pos­si­bil­ity of a re­duced sup­ply, mark­ing its high­est point since Septem­ber 2013 and its sin­gle largest weekly gain so far this year.

Shares in the U.S. were also down on Thurs­day, de­spite other­wise solid data point­ing to a re­cov­ery.

The fuel-de­pen­dent avi­a­tion in­dus­try too took a hit, with the In­ter­na­tional Air­lines Group clos­ing the week al­most 10% down at 379p.

The U.S. will likely wait and watch for sev­eral days be­fore tak­ing mil­i­tary ac­tion, given in­vestors no real choice but to do the same. Should the sit­u­a­tion calm, so too will the fi­nan­cial mar­kets. Should too will mar­ket vo­latil­ity.

The closer to re­al­ity the threat to oil sup­ply and pro­duc­tion edges, the higher the oil prices and the lower the stock prices we can ex­pect to see in the com­ing weeks.

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