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.

Posted in Categories: Commodities, Contributor, External Research, USA.

Subscribe by RSS Subscribe by Email