In my most recent article on the price of oil (to read it, CLICK HERE), I wrote “…if a war broke out, oil supply could be reduced and demand could rise. I’m not suggesting this, but I will keep one eye on Russia and Ukraine.” While I had the right idea, I had the wrong adversaries. In this article, we’ll examine the current conflict in Yemen and discuss the possible impact it could have on oil prices.
The Current Conflict
The Middle-East has been a conflict hot-zone for several millennium. More recently, we watched the Arab Spring, which erupted in December 2010, bringing destruction to the region. Today, we have factions fighting for control of Yemen. In fact, the Yemen skirmish is the country’s most serious crisis in years. Because of Yemen’s location, Saudi Arabia and Egypt have become involved in the conflict. Meanwhile, Iran has condemned Egypt and the Saudis for their involvement and it appears the U.S. has decided to simply observe the situation as Yemen slips deeper into political unrest.
Yemen: Strategic Importance
Referring one last time to my previous article, I stated that if a conflict broke out involving a major oil producing nation or if one happened along a major oil transportation route, oil prices could spike. Although Yemen is not a major producer of crude, it is strategically located along a major transportation route where the Red Sea meets the Gulf of Aden. There are actually three countries which create a chokepoint (see map). They are Djibouti, Eritrea (both in East Africa) and Yemen. It’s vital to keep the waterway free of obstruction and commerce flowing.
However, this is no small task as the area is filled with risks. For example, in 2002, al-Qaeda was responsible for blowing a hole in a French supertanker off the southeast coast of Yemen. Then there’s Somalia, a country rife with danger located just as you exit the Red Sea and enter the Gulf of Aden. Any major disruption in the flow of oil through this waterway, or any goods for that matter, would be felt around the world.
How Far Could Oil Prices Go?
Normally, when a conflict occurs, causing oil prices to spike, it is a temporary situation, not a prolonged event. In this case, I suppose the spike in oil will depend on how long tensions persist. It is worthy to note that the situation in Yemen is an opportunity for ISIS and other terror organizations to gain a stronger foothold in the region. If this occurs, it could cause some damage to western economies, the very thing ISIS is intent on doing. Even so, supply is still quite high and demand is weak. Therefore, the price of oil could remain near its present level or possibly retreat to where it was prior to the conflict.
With Yemen in the throes of conflict, it’ll be important to see if other countries join the battle or if it remains confined to a few nations. What will happen to oil shipments in the interim? With the conflict in Yemen, and with Somalia located just around the corner, peace in the region has been rather elusive. However, that’s nothing new and I suspect it will continue for a very long time.