By Cihan Ergul

The reality that oil-producing locations are at the same time the most troubled areas of the world is not a coincidence. Every explosion picture popping up in the news eventually increases the risk premium for that region and helps the oil price keep its upward trend accordingly. More importantly, every bomb hitting the inflammable sources of a country shuts down that energy center for an undesirably long time. On the other hand, victims of the high prices in oil are quite global. From British Oil Companies to Thai Central Bank, everyone tries to minimize the negative effects of record high prices. United we loose.

Deutsche Bank points out the same reality in its July report: “The globe is underinvested in the infrastructure required to meet strong demand for oil and gas.” (And we were just talking about explosions.) If alternative energy sources such as hydrogen or cold fusion are still a distant utopia, OPEC is the door you should still knock on. But this time they are desperate too. They produce at full capacity and there is no more room to increase the capacity in today’s conditions.

First in Iraq, as the sustained violence is still in effect and political picture of the region stands blur, no one can expect a healthy trade activity between this country and rest of the world right now. As some argue, if the situation in Iraq carries a hidden economic benefit, oil prices will journey from 85 cents to $1.35 per barrel. Even if the tension eases in the region, the political future of significant places like Kirkuk will still be a question mark.

Kirkuk is the center of oil industry and located in northern Iraq. In the past, almost half of Iraqi oil exports used to come from this region. And today, since the importance of the region is quite obvious, it is also a center of political and sometimes physical insurgency among the communities of different ethnic backgrounds. At this point, Kurdish existence in the north of the country seems determined to make Kirkuk the capital city of Kurdish federal state or of a totally independent country.

In either scenario, aside Turkish opposition, Arab OPEC countries probably will not welcome this change in the region. Politically, Middle East countries such as Iran (another OPEC member) and Syria have a Kurdish minority and will probably border this Kurdish state which is a candidate to be an oil resource. If this happens, the region may witness more tension in the future and once again the struggle will all be focused on these oil resources.

Another negative outlook about the sector is coming from the recent problems between the giant Russian oil corporation, Yukos and the Russian government. With the beginning of the Putin administration in August 1999, a power struggle has been held between so called oligarchs (a group of businessmen playing key roles in the private sector) and the government. And the recent attack of the Putin administration to the peak of oligarch pyramid earlier this year was also breaking news for world oil industry. With the arrest of Hodorkovsky, CEO of Yukos which was the fourth largest company of the world and whose oil production is almost equal to Kuwait’s, the world oil sector along with Russia’s overall economy was affected negatively. Today, unsolved tax issues of the company with the government are the main source of concerns. And as long as Yukos and other oil producing companies will go through this unusual process, world oil production and oil prices will be subject to the results of this struggle as well.

As we mentioned earlier, new investment in oil production is at the minimum level because of the tension in oil production regions. Another natural result of this picture is that oil companies are beginning to search for possible oil fields in new and rather more stable areas of the world. One of these regions is the Black Sea. Even though the results of this search process are not clear yet, the chance of political storm is yet to come around the region. Georgian President Mikhail Saakashvili stated A war with Russia is ahead regarding some army base problems with Russia. Besides this situation, Black sea region along with many other new regions don’t promise the quality and the quantity of oil produced in Middle East. Depending on the fact that oil sources in the Middle East will run out one day, regardless of political problems, we are already more likely to see a fall in the overall capacity of world oil reserve in the future.

At the bottom line, despite a recent ease, oil prices are still at record high levels and more importantly structural problems in the industry are a major issue. I guess nowadays things have been more difficult for a U.S. household, especially for a student. So don’t let the engine run at idle, avoid using air condition in the car as much as possible and next time make sure that there is really that weapon of mass destruction out there.

Cihan Ergul is a business graduate student.