An escalation of geopolitical tensions in the Middle East, Libya and Ukraine will continue to add risks to the global oil markets, although oil prices have been largely stable since 2013, owing to a glut in supplies and a weaker-than-expected growth in demand. Global oil prices are an important economic indicator for businesses and consumers, as it affects inflation, households’ purchasing power, and industry’s production costs, thus having far-reaching implications for economic growth prospects.
- Regional political unrests have been on the rise since early 2014, with growing tensions from Iraq, Syria, the Gaza strip, Libya and between Russia and Ukraine. This will fuel the risk of disruptions in global oil supplies, as the Middle East and Russia are among the world’s largest oil producing countries/regions. The Middle East made up about one-third of global total oil production in 2013, according to BP Amoco;
- Nevertheless, global oil prices have remained subdued in the first half of 2014, driven by rising production and flat oil demand. The average spot price of Europe Brent crude oil stood at US$107 per barrel in July 2014, representing a month-on-month decline of 4.4%;
- The USA’s oil production capacity rose to 10.0 million barrels per day in 2013, soaring by 47.5% since 2008, due to a surge in shale oil extraction. Saudi Arabia is also extracting more oil to offset shortfalls caused by production disruptions in some countries in the region. Meanwhile, growth in oil demand has slowed, as a result of weaker-than-expected economic data from the eurozone and the USA in the first half of 2014;
- However, the outlook for global oil prices in the short term will continue to depend largely on geopolitical situations in the Middle East, North Africa and Ukraine, as well as on growth in global oil demand. A spike in global oil prices will affect economic growth prospects, reducing consumers’ purchasing power and putting downward pressure on company profits.