Oil's next danger zones

Whether you produce the stuff, refine it, consume it or speculate in it, it's impossible to separate oil from political risk.

Today the focus is on Egypt and Libya. Tomorrow, it could be Algeria, Saudi Arabia or Nigeria that triggers a price shock.

The supercharged price of crude is part of a new normal, where political risk trumps the old law of supply and demand.

“Oil increasingly comes from unstable parts of the world,” pointed out geopolitical risk expert Ian Bremmer, president of Eurasia Group. “It’s the Persian Gulf, it’s West Africa. It’s the Caspian. Those are not places we vacation. Those are places over time that are more and more unstable.”

And in this uncertain environment, politics matters more than market outcomes, Mr. Bremmer said.

In the grand scheme of things, Libya is a relatively small oil player. It’s the 18th-largest producer in the world and ranks ninth in proven reserves. The world can easily cope without its oil.

The concern, however, is that Libya is a harbinger of what may lie ahead in the Arab world, where democracy is stunted and small elites control the vast oil wealth.

As instability moves up the ranks of oil-producing countries, the price spikes are likely to be longer and more intense.

“It’s been so hard to predict where the next domino might be. If you look at a map, you’ve got Egypt, Tunisia, Libya,” remarked James Hamilton, an economics professor at the University of California-San Diego. “Algeria would be another possibility. And they’re a bigger oil producer than Libya.”

The damage so far seems to be contained. But the risk of further disruptions remains “pretty considerable,” Prof. Hamilton said. Just imagine, then, what the impact would be if the turmoil hit production in Saudi Arabia or Iran, the world’s No. 2 and No. 4 producers.

“If it were to end up in some place like Saudi Arabia, of course that would be a whole new ball game, in terms of the potential disruption to world supplies – bigger than anything we’ve ever tried to get through,” Prof. Hamilton said.

Here we take a look at the world’s crude hot spots, and rate the potential for unrest. (more)