If anyone believes that ISIS is only a political problem, they should investigate the situation further. ISIS, an acronym for the Salafist-Islamist insurgent group, is a terrorist band more militant than even al-Qaeda (and we thought they were bad enough!) It has already seized major cities in Iraq including its second largest city, Mosul, with a population of approximately two million. Can Baghdad be far behind?
The militant group has as its goal to convert the Middle East into an Islamic state and control it in total politically and economically. Everything today is based on business and trade and no matter how we look at it, it is money that controls all government decisions. When it refers to the Middle East, it is primarily about oil production and global distribution.
Oil: Mainstay of Iraq
Oil continues to be the mainstay of Iraq's economy with oil reserves estimated at 143 billion barrels, the fifth largest in the world and the highest in the Middle East after Saudi Arabia and Iran. The current rate of oil production is over 3 million barrels a day, the second highest in the Middle East and following close to Saudi Arabia. Oil accounts for 54 percent of the country's GDP of some $230 billion, 99 percent of exports, and 93 percent of government fiscal revenues.
Because of this high degree of oil dependency, production and world market prices essentially drive the Iraqi economy. Additionally, Iraq has a state-dominated economy and almost all oil revenues from foreign and domestic sales of oil go directly to the government kitty. Since the non-oil economy is only affected when the government spends these revenues, the government influences virtually all economic activity in the country through its control over the oil sector.
Prices Rise
Despite these factors, there is no clear cut consensus regarding how ISIS and its future takeover plans will affect world economies. There are market analysts that believe unequivocally that as the situation deteriorates politically, the Middle East will continue to withhold production of its crude and then use it as a bargaining chip, causing the price to go up accordingly.
Under normal conditions, a military conflict of any kind, especially in the Middle East, raises the per barrel price of oil. An immediate impact of the U.S. stepping up its efforts to quell the belligerent ISIS could be the disruption in the supply of Iraq's oil on the world market, causing an escalating effect on oil prices, already at $110 per barrel and rising.
Surprisingly, its affect so far has been muted on most fronts, including on financial markets and economists are not expecting any major market disruptions to occur for the time being. They are, of course, monitoring the situation carefully.
Drop in Prices
In fact, there are other analysts that see crude prices dropping over the next few months despite the crisis taking place in the Persian Gulf. The national average for unleaded in the U.S has been steadily dropping since July and some analysts are predicting that it may dip to $3.00 or below before the end of the year.commercial water slides buy
Oil prices dropped to around $95 a barrel last week despite unrest in overseas regions. In order to feel the impact in crude prices, a disruption of oil shipments or oil production would have to take place and analysts do not foresee this happening in the very near future.
Some analysts see more oil reaching American shores. The international community has taken steps to eliminate Iraq's stockpile of poison gas weapons and oil has begun flowing again through a significant Libyan pipeline that was closed earlier this year by striking militias. Oil is crisscrossing the globe on freighters in search of markets and this surplus can stay afloat only so long. Energy analysts at Citigroup report that there is more than 30 million barrels stored on floating barges and needs to go someplace sometime. They forecast Brent at $70 to $90 per barrel, and we are already starting to see this descent.
This optimistic financial outlook is not shared by all or even most economists who foresee the growing signs of disintegration in Iraqi and other crises in the Middle East as foreshadowing a repetition of the oil price crisis of 2008 when prices reached an unprecedented $140 a barrel.
An additional factor in the fluctuation of oil prices which is already playing havoc with global economies is the already badly damaged oil pipeline from Kirkuk to the Turkish terminal of Yumurtalik, a result of ISIS recent attacks. This has halted the oil flow out of the Persian Gulf and is having an instant impact on global oil prices. It is also causing a jump in Turkey's inflation and a competition problem for Turkey's oil exports.
Only time will tell in which direction prices of crude oil will take and just how its fluctuations will affect world economies. In the meantime, everything seems to be status quo. Stay tuned"¦.