Reports that a military strike against Syria by the US and its Western allies is imminent have rattled global markets. If history is any indication, every time geopolitical tensions have surfaced, crude oil prices have shot up. This time is no exception. To be sure, Syria is not a major oil producer, but it does have a powerful backer in Iran and the entire region is a tinderbox. Hence the concern in the markets. The problem is oil prices may continue to rise merely in anticipation of an attack, as the political risk premium increases.
Here are some previous instances when crude oil prices increased on account of political tensions:
1990—The Iraq-Kuwait war. The invasion of Kuwait started on 2 August 1990. Brent crude prices doubled to $40 per barrel on 9 October 1990. Still, the 1990 oil price shock wasn’t as bad as the earlier oil crises of 1973 (the Arab oil embargo) and 1979-80 (the Iranian revolution). Anyhow, by the end of 1990, prices had dropped by 30% from their peak during the year.
2003—Invasion of Iraq led by the US starting 20 March to 1 May 2003. Brent crude prices weren’t unusually low a few months before the war had started, but during this period, prices increased by about 7%. What’s heartening is that by 1 May, prices had declined at a faster pace of 12%.
2010—The Arab Spring, or the riots and civil war in the Arab world that began on 18 December 2010. In some countries, conflicts continue. Brent crude oil prices have only seen an increasing trend during this time. Brent crude stood at about $92 per barrel at the beginning of this period, but increased 28% by the end of the first three months of 2011.
Going by the above instances, oil prices are at risk again if Syria is attacked. Everybody knows about the adverse effect an increase in oil prices will have on India, which is the world’s fourth largest importer. In 1990-91, it was the first Gulf War that precipitated the balance of payments crisis.