POLITICAL JOLTS HURT FUTURE OIL DEMAND

"Nigeria has replaced Yemen as the primary source of supply concerns this month."

So states the International Energy Agency's latest Monthly Oil Market Report, which covers July. The observation cleverly acknowledges chances for some new source of supply concern in August, in September, and so forth. Indeed, the list of potential upsets to crude oil supply is long. An Islamic movement has destabilized Algeria. Much of the Middle East remains a political tinderbox. Politics and economics remain adrift in the former Soviet Union. Venezuela and Mexico face political uncertainty.

PRICES SWING

Futures prices for crude oil in the U.S. and Europe swing on each new rumor of trouble or truce. And well they should. Loss to the market of the exported portions of, say, Nigeria's prestrike 1.9 million b/d or Yemen's prewar 400,000 b/d certainly would have some effect. Yet cessation of all of either country's production has never been likely. The oil workers' strike in Nigeria so far has cut flow by perhaps 200,000 b/d. Civil war in Yemen reduced crude output by maybe 15,000 b/d. Even with idle production capacity around the world low by historic standards, the Yemeni and Nigerian reductions don't make huge waves in a 32 million b/d market for internationally traded oil.

The upsets are significant for the jitters that they rightly give oil prices in a period of rising demand. But they have consequences potentially more lasting and important.

Civil wars and oil field strikes reduce the appeal of affected countries to international oil companies. Economic development in places like Nigeria and Yemen depends heavily on capital and technology from elsewhere. Neither country can be as attractive to those necessities now as it was before its troubles began. There is no way to tell how long international oil operators in Nigeria will have to endure peril, uncertainty, and interrupted production. In Yemen, the turmoil ended quickly, yet some companies that had been exploring there may not return (see Watching the World, p. 42).

Political chaos thus hurts chances for economic progress in the two countries most recently and prominently in the news. To some immeasurable degree it also hurts future crude supplies from them.

BROADER CONSEQUENCE

A broader consequence, one that should concern all producing countries and companies, is that political instability detracts from the appeal of oil as a fuel. The argument is made with increasing frequency that oil consuming nations should prefer other fuels to petroleum, however more costly and less convenient they may be, because so much oil comes from regions that are so unstable. Striking Nigerians and Yemeni rebels aren't likely to care much about such matters. But instability's effect on the political marketability of oil is something that governments of exporting countries, especially those tempted to support or incite trouble elsewhere, should never forget.

Security of demand--increasingly a function of consuming-nation politics--should be as important to producers as security of supply is to consumers. The market can smooth over all conceivable supply disruptions as long as there is some measure of spare production capacity, the resource base affords room for reserves growth, prices remain free, and international capital retains access to exploration and development opportunities. Political jolts such as those in Nigeria and Yemen certainly have consequences in these areas. What should worry industry and producing-nation governments most, however, is how they affect the industrialized world's willingness to fuel economic growth with petroleum.