How ISIS has affected the price of oil

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Americans are opening up their newspapers and turning on the television to see a headline that's about as old as dirt: new trouble in the Middle East. Just as the last American troops leave the combat zones of Iraq and Afghanistan, a new breed of Islamic insurgency springs up to take advantage of the power vacuum. The Islamic State of Iraq, known colloquially in the western world as ISIS, has seized control of a number of territories throughout northern Iraq and Syria, where chaos is the norm and there are few persons capable of saying "no" to their expansion. ISIS requires Iraqi oil wells in order to fund their operations, however, and their seizure of key locations and facilities in Iraq threaten the availability of oil within the broader Middle East. How has this new terrorism group affected the price of oil since their genesis?

Numbers Games

President Obama announced that the American military would take an active role in limiting the spread of ISIS, although he stressed that it would be from afar, without direct intervention with "boots on the ground." With the belief that American military posturing would limit the outflow of Iraqi oil, the first reaction to the announcement was a conservative double-down on basic commodities, which rise in price during times of crisis. Oil speculation leapfrogged until the cost of crude rose to $119 a barrel, the second-largest spike in the history of investment after only the 2008 peak of $141 per barrel (during the early 1980s oil crisis, the cost of oil rose to about $105 per barrel when adjusted for inflation). While this increase is significant, on a percentage basis it's not as steep of a leap as experienced during the 2003 invasion of Iraq, when oil rose from approximately $25 per barrel to nearly $40 per barrel, or an increase of 60% in the span of only a few weeks. Furthermore, the increase in price of oil was relatively minor compared to the increase in costs of other commodities: the value of gold shot up by $50 per ounce, the second-highest amount the precious metal had hit in the 2014 fiscal year. The lesson here is clear -- if you think ISIS is a threat, invest in gold and not oil.

Foreign and Abroad

Why hasn't ISIS affected the price of oil to the same degree of the Iraqi invasion, when ISIS threatens to cut off supply entirely whlie the 2003 miltiarization only reduced the operational capacity? Domestic oil production has surged to degrees not seen in the United States since prior to the 1920 discovery of oil in the Persian Gulf, back when most US oil came from derricks in Pennsylvania and West Virginia that have either since run dry or proven far more expensive to operate than in comparison to imported crude. The Bakken oil shale deposists in the Dakotas are believed to have enough oil to completely power the US energy needs for the foreseeable future. That's been the resultant cause of oil prices dropping on a world-wide basis. You've probably noticed it as gas prices fall below $2 per gallon and you are able to fill up your tank with just a single green picture of Andrew Jackson (perhaps two green pictures, if you drive an SUV).

Future Reservations

The bigger picture for the cost of oil is whether or not ISIS can mobilize into the southern part of Iraq. Currently, the so-called Caliphate controls most of northwest Iraq, which is relatively poor in oil compared to the southern deserts. While they own the richer plains of eastern Syria, the three-year-running civil war in the neighboring nation has crippled the infrastructure needed to collect and export (and, thus, profit from) the oil reserves. So what is ISIS to do? They need the conflict in Syria to continue as long as possible since it's their major recruitment draw. They don't have the muscle mass needed to invade the southern parts of Iraq and take over the richer oil deposits. Whenever they do try to invade the souther, furthermore, you can be certain that the US and much of the rest of the world will put a much harder foot down on their operations. So the price of oil will likely stay stable unless ISIS starts something big, which is possible but unlikely as their power deteriorates daily at the hand of American airstrikes. One wonders whether ISIS-controlled Iraqi oil is fueling the planes that are dropping bombs on the ISIS leaders.

Real Changes

Investing in oil, at present, isn't the wisest idea. The price is falling and will likely continue to fall further still, although it's hard to see it dropping below about $20 per barrel. The more it drops, furthermore, the more will be used up, and with greater demand comes a rebound in prices. So the recommendation is to buy shares of oil commodities or stock in oil companies eventually, but to wait a few weeks or months more. In the event of a (very realistic) major global shake-up, however, put as much of your life savings into oil as possible. Such shakeups may include ISIS if they:

  • take control of Syria (somewhat likely)
  • take control of southern Iraq (mostly unlikely)
  • go to war with a Kurdish breakaway state (very likely)
  • try to gain a foothold in a neighboring oil-producing state like Kuwait or Saudi Arabia (almost certain)

In the meantime, it's better to invest in other commodities that rise as the cost of oil falls. Precious metals usually follow oil in a relatively similar fashion, so barring an unlikely shortage it'd be a good idea to sell high on your shares in gold, silver, platinum, or palladium. By contrast, commodities like cattle or wheat are set to explode in value due to the rising costs of food and more expenditure on food as the economy recovers. Imports will also rise with increased spending power, making coffee or cocoa a great bet to offset any losses from the drop in oil.

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