By Nick Cunningham: The spike in instability in several oil producing regions around the world is threatening to knock some production offline, but it is also boosting profits for drillers operating in trouble-free zones.
Oil prices have hit their highest levels in almost 9 months as places like Iraq, Syria, Ukraine and Libya continue to experience violence and political upheaval. For companies with heavy investments in these regions, the situation is perilous, but for oil companies elsewhere, the higher price is good news.
This past weekend, militants from the radical Sunni organization ISIS gained control over another town in Iraq, along the Syrian border. As news of their victory was still being reported, Brent crude closed just below $115 per barrel (June 22) and West Texas Intermediate (WTI) rose to nearly $107.
Oil markets could be looking at an extended period of elevated prices, which is bad news for companies with billions invested in Kurdistan or other parts of Iraq. ExxonMobil and BP already started evacuating some of their workers from southern Iraq, despite the fact that militants remain north of Baghdad.
But for companies drilling far from the violence – in Texas for example – a $5 per barrel increase in prices can be the difference between whether or not an oil project is economically viable.
Oil companies are using the opportunity to step up drilling. The Eagle Ford shale in southern Texas, for example, saw four more oil rigs and one gas rig come into operation over the past week. Across the U.S., the number of oil rigs in use reached 1,545 — the highest level since record keeping began in 1987.
Total dollars invested are also expected to reach record levels. Oil services firm Baker Hughes, Inc. projects that oil and gas companies will pour $165 billion into exploration and production this year.
“There is room for additional upside amid the current commodity price environment and the potential for increased capital deployment into the U.S. markets stemming from geopolitical risk internationally, notably Iraq,” said James West, an analyst with Barclays, according to Bloomberg News. In other words, trouble in the Middle East is profitable for drillers in Texas.
Of course, it is not just oil companies in the U.S. that are profiting from expensive oil. Higher prices mean more revenue for petro-states such as Saudi Arabia, Russia, and even smaller exporters like Malaysiaand Bahrain. In Russia, for example, the ruble rose to its highest level in over three weeks on June 19, and the MICEX – Russia’s major stock exchange – continues to rebound after falling on the crisis in Ukraine.
At the same time, it is possible to have too much of a good thing. In an interview with Monitor Global Outlook, Mohammed Ali Yasin, the managing director of the National Bank of Abu Dhabi, explained the downside of a sudden oil price spike to Persian Gulf states, even though they rake in more money. “I don’t believe that political tension anywhere near the GCC would be good for any country. These spikes are usually temporary and political instability will down-weigh any increase in revenue. Foreign investors will put a premium and will expect higher returns in order to come here,” he said.
An unexpected surge in prices could provide welcome budgetary relief to states on the Arabian Peninsula, which are still trying to recover from Arab Spring unrest. But over the long term, instability will hurt oil-dependent economies.
This piece is cross-posted from OilPrice.com with permission.