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Nigeria’s War is Central to the Price of Oil
The recently successful attack on an offshore oil platform by MEND was the first successful attack on any offshore facility by the rebel group that purports to represent the interests of the poor people of the southern Nigerian Delta region where most Nigerian oil is produced. It has taken 225,000 b/d off the market for an indeterminate period. The successful attack on an offshore rig is significant above and beyond the immediate loss of oil production because all future planned expansion of Nigerian production, totaling 1.25 mb/d through 2013, will be offshore and is thus newly put at risk by MEND’s enhanced military capabilities.
The possibility of such production being kept off the market by excessive insurance costs or by the human risk/return calculations of the international oil companies scheduled to produce from the new fields is probably one support for today’s high oil prices. If these companies do in fact begin to put these projects on hold, no doubt oil prices in the out periods will be pushed substantially higher than otherwise would be the case.
Of course any country with the size of oil production and potential for expansion that Nigeria has (about 2 mb/d) would be important to oil prices in the present circumstances of very limited global spare capacity. But Nigerian crude is especially prized these days because it is the most sought after light sweet crude on the market. Moreover, a great deal of Nigeria’s oil exports go straight to the U.S.
Given the pivotal position of Nigerian crude and the sudden global focus of nearly everyone on oil, it is surprising to me that this Nigerian war does not seem to get more attention from our government and from the press. That such a complex situation is not well understood by ordinary citizens is not surprising given the lack of press coverage. But one would think that professional diplomats and our military would understand the significance of events in Nigeria enough to be more involved. For my part, I have very frequently posted about events in Nigeria as crucial to oil prices
What seems to be happening is a civil war of sorts, a bit similar to Sudan’s Darfur conflict which does receive a huge amount of global attention. Darfur also has some origins in the oil world but Darfur’s massive violence is what has grabbed global headlines. MEND has caused far less violence, but it has threatened to shut down the Nigerian oil industry and is so far putting up a credible effort. Should MEND succeed, the implications for the price of oil and therefore the welfare of the global economy would be catastrophic. It would actually have much more impact on the world at large than Sudan/Darfur could ever have. One would think such a risk would deserve more attention, if not, indeed, more action.
Before the recent Saudi summit meeting I suggested that one of the things the King could do to lower the price of oil would be to focus the world’s attention on Nigeria and suggest the formation of an international diplomatic team to mediate the conflict. Clearly the King had no such thoughts, which may be one reason his meeting did not have the result of lowering oil prices as he presumably intended. So I repeat - to anyone connected with any politician who truly wants to see lower oil prices - pass it along: pay attention to Nigeria.
Meanwhile, for an in-depth analysis of both the recent Nigerian events and the Nigerian problem as a whole and an intelligent and well informed follow on discussion, I highly recommend this post at The Oil Drum. In general I find the information offered in various forums at The Oil Drum to be indispensable for a cogent understanding of developments in the world of oil. The site contains far more information than is presented on this site, although in general it does not deal with investment issues in much depth as we do here. There is a link to The Oil Drum on my site in the left column.
I will not begin to re-hash the post on Nigeria found on The Oil Drum, but I will suggest that if you do not take the time to become familiar with Nigeria, you will not have as robust an appreciation for the oil market as you might want.
Tags: peak oil energy investment
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5 responses so far ↓
1 mark // Jun 25, 2008 at 12:21 pm
I think if you look at the history of the conflict in Nigeria, it has been going on for years and not likely to be mediated………..much like the mideast.
2 Jim Kingsdale // Jun 25, 2008 at 1:46 pm
It certainly won’t be mediated if nobody (meaning the U.S) tries.
3 KV // Jun 25, 2008 at 4:03 pm
Jim,
I have a question: since the nearly quarter of the EIS portfolio is in oil/gas futures (I don’t know short or long), would it be influencing the posts that seem to imply oil to the roof or intervention in various countries?
MEND came into public in 2006, and there is no declared leadership, and it is basically faceless (Wiki).
The loss of production (225k barrels/day) comes to about 1/4 of a percent of daily production. I believe such fluctuations do not mean much except lot of hyper activity.
FYI. Niger Govt. has asked Brits and US to provide technical assistance to fight the MEND.
4 Jim Kingsdale // Jun 25, 2008 at 5:34 pm
KV: I am long options on long dated oil futures (not as much as last month) because I believe very strongly that oil will be a lot higher in five years and the futures options act as insurance in case oil goes so high so quickly that the stock market and the economy tank which might take oil stocks down with it.
That said, my call for actions to mediate the Nigerian problems would serve to reduce the price of oil if it were successful. I don’t root for higher oil prices. Rather I believe oil will go higher no matter what is done to mitigate the growing shortage. But from a policy point of view, I’d prefer the price increases to be more measured and slower than has been the case since early 2007. That’s why I think we should try to help mediate the social and political problems that are reducing Nigerian production.
I have no illusions that it would be easy or even likely that outside experts could help to bring about a peaceful solution in Nigeria. But I think it should be attempted in the interest of a healthy global economy. Success in helping Nigeria would not be particularly good for the EIS portfolio nor the futures position in particular.
5 KV // Jun 25, 2008 at 5:59 pm
I commend your forthrightness. Thanks.
My concerns are the same, except that oil even at $135 is hard to digest for nearly 80% of the world. Just today, Warren Buffett went on CNBC stating inflation is way high. With inflation comes high rates, and wage earner falls behind.
Our history shows that most republican administrations have created economic problems and have been adventuresome in foreign lands (Democrats are not far behind except that they do increase standard of living somehow). I think we need to pay attention to our problems. We are on edge of deep recession if we do not manage this crisis. Just today, Rockwell Automation revised earnings downwards, and they are active in oil and gas.
I do not believe Bush administration would do anything except lots of talk about becoming energy independent. Their solution is to give away natural resources to private hands and wait. Or, support boondoggles likes ethanol. I don’t care whether there is global warming or not, I know that crops are failing (floods, draughts, fires) and world food stocks are going down while the population pressures are mounting. Losing millions of people is now common, whether earthquakes, flooding, typhoons, or wars.
Finally, I do understand Darwinian solution: collapse of economy followed by collapse of oil prices, and sadly, loss of billion people or more. Lemmings do this.
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