The Fuse

Why the Syrian War Is Not Pushing Up Oil Prices

by Nick Cunningham | October 07, 2015

The Syrian war has rattled the Middle East and increased tensions between Russia and the U.S., but there has not been any significant impact on oil prices.

The fighting in Syria has ratcheted higher, rattling the Middle East and causing tensions between Russia and the U.S., but there has not been any significant impact on oil prices.

The Russian and United States governments, for the most part, share the same objective in Syria, to defeat the militant group Islamic State and bring political stability to the region, but American officials see several ulterior motives in Moscow’s recent intervention. For example, Russia could be looking to end its isolation from the international community that stretches back to when the crisis in Ukraine exploded in early 2014. By intervening in Syria, Russia has positioned itself as a key player in the fight against the Islamic State and it immediately becomes a diplomatic heavyweight. In fact, the U.S. State Department has commented on Russia’s sudden entry into the region, saying that the U.S. would “welcome a constructive role for Russia if it takes the fight to ISIL,” using an acronym for the Islamic State.

At the same time, Russia can pursue its objective of propping up Syrian President Bashar al-Assad. Syria is a long-time Russian ally, and is also home to Russia’s lone Mediterranean naval base, something that Russian President Vladimir Putin no doubt wants to hold onto.

Russia’s recent airstrikes have repeatedly targeted CIA-backed Syrian rebel groups, rather than Islamic State militants, according to the U.S. government, evidence that Russia is focusing more on supporting Assad’s position rather than taking the fight to the Islamic State.

At the same time, by linking the refugee crisis in Europe to the conflict, and urging the world to support Assad as a bulwark of stability, Putin is gaining some traction in European capitals. German Chancellor Angela Merkel admitted in late September that both Assad and Russia, among others, will be needed for a resolution to the multiyear civil war. Russian President Vladimir Putin has made himself indispensable to any political solution in the region.

While Russia is pursuing several national security interests through its intervention in Syria, it threatens to widen a conflict that is already rife with complexity.

While Russia is pursuing several national security interests through its intervention in Syria, it threatens to widen a conflict that is already rife with complexity. The tangled web of overlapping interests is difficult to unravel. The U.S. and its Gulf allies want Assad out; Iran and Russia do not. The Iranian nuclear deal has started to thaw relations between the U.S. and Iran, to the dismay of America’s traditional ally Saudi Arabia. Meanwhile, Iran, Iraq, and Syria have agreed to share intelligence with Russia, a development that caught Washington off-guard. Also, the Kurdistan Regional Government – a crucial U.S. ally – welcomed Russian airstrikes. Russian airstrikes on U.S.-backed Syrian rebels could provoke an American response, but the U.S. is wary of becoming bogged down in a proxy war with Russia, and all parties involved want to defeat the Islamic State and bring peace to Syria, but obviously, there are substantial disagreements over how to achieve that.

As the conflict metastasizes, brings in more outside powers, and shows almost no hope of a near-term resolution, one would think that the oil markets would have become jittery by now. Middle East conflicts have historically sparked a rally in oil prices, but so far, oil traders and speculators are shrugging off the war in Syria.

Geopolitical Risk and Oil Prices

Time and again, violent conflicts have dramatically affected oil prices, especially when they occur in the Middle East. Disruptions in supply, or more often than not, the potential for disruptions in supply, tend to send prices skyward.

Let’s take a few historical examples. In 1990, at the start of the Persian Gulf War, oil prices nearly tripled between June and October, jumping from $15 to nearly $42 per barrel.

When revolution spread across the Middle East during the Arab Spring oil prices also spiked, shooting up from $90 per barrel when the first demonstrations started in Tunisia in late 2010, to a high of $126 per barrel in April 2011 following NATO airstrikes on Qaddafi forces in Libya.

More recently, oil prices spiked in June 2014 after the Islamic State made lightning advances across Iraq and seized large swathes of territory. Oil prices fell back a bit once it became clear that Iraq’s oil production was not seriously under threat.

Syrian Civil War Destroyed Its Oil Sector

Syria’s oil sector hit a highpoint in 1996 when it produced .58 mbd, after which production steadily declined, hitting .38 mbd just before the outbreak of civil war in 2011.

Syria’s oil sector hit a highpoint in 1996 when it produced .58 mbd, after which production steadily declined, hitting .38 mbd just before the outbreak of civil war in 2011. The war between the Syrian government and rebel forces, plus the onslaught of the Islamic State, has essentially cut off all meaningful sources of oil production in the country.

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The country has 2.5 billion barrels of oil reserves, more than any of its neighbors aside from Iraq. But war has damaged much of the country’s infrastructure, including oil and natural gas pipelines, oil fields, and much of the electric grid. Several oil fields have fallen under the control of the Islamic State. The country now suffers from power outages and a shortage of refined fuels.

Even if the international community could somehow beat back Islamic State militants and bring peace to the country, it would take many years for Syria’s oil sector to get back on its feet. Simply put, Syria has ceased to be an oil producer, with no prospect of a rebound in the foreseeable future.

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A Drop in the Bucket

Given the historical link between conflict in oil producing regions and gyrations in the price for crude, one might wonder why a civil war in Syria, which is growing into a regional proxy war, would not also cause oil prices to spike?

Syria has been torn apart, but its role as an oil producer simply isn’t that important to global supplies. To put Syria’s lost production in context, Syria’s neighbor Iraq – also ravaged by Islamic State attacks – has managed to more than make up for Syria’s loss of 380,000 barrels per day. Since last year alone, Iraq has succeeded in increasing output from an average of 3.37 million barrels per day to over 4 million barrels per day as of August 2015, or about double the entire lost output from pre-war Syria.

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Likewise, Saudi Arabia has increased production by around 700,000 barrels per day since last year, as it seeks to maintain market share. Meanwhile, although estimates vary, Iran hopes to increase production by 500,000 to 1 million barrels per day in the months following the removal of international sanctions.

The world continues to be awash in oil, muting the impact of conflict in the Middle East. The IEA estimates that global supplies will continue to exceed demand until late 2016.

Moreover, there are more important sources of oil production than Syria that are declining around the world. The U.S., for example, has lost about .5 mbd in output since April as low prices force cutbacks in drilling. And although civil war and ISIL militants have destroyed Syria’s oil industry, violent conflict in Libya is arguably more damaging to global supplies. Libya’s output is down to just 300,000 barrels per day due to its own civil war, down from 1.6 million barrels per day the country produced under former dictator Muammar Qaddafi. What is most disconcerting for oil markets over the long-term is the potential for a shortfall in investment from the conflict, particularly in Iraq. The IEA projects large increases in production from Iraq in the years ahead, but conflict could prevent the investment needed to achieve such immense gains in output.

Brewing Conflict

The next steps are unclear, but the Syrian war could yet grow into something worse. It is hard to imagine war between any of the great powers, including the U.S. and Russia, but the risk of a larger regional conflict is very real.

The next steps are unclear, but the Syrian war could yet grow into something worse. It is hard to imagine war between any of the great powers, including the U.S. and Russia, but the risk of a larger regional conflict is very real.

Russia is hoping to emerge as a global player once again with its entry into the conflict, while securing its ally in Damascus. Saudi Arabia, intent on seeing the ouster of Bashar al-Assad, is not pleased. Following Russian airstrikes in Syria, Saudi officials hinted at a stepped up military effort to remove al-Assad. The U.S. could also respond much more forcefully, following Russian airstrikes on anti-Assad forced. For now, a war-wary U.S. government will likely keep the conflict at arm’s length.