How War Impacts Oil and Gas Prices

  How War Impacts Oil and Gas Prices

There are several factors that can impact the price of oil and gas, from geopolitical tensions to natural disasters to OPEC’s decision on production levels. However, war is one of the biggest factors impacting oil and gas prices, particularly with regard to the cost of crude oil and its derivative products. Let’s take a look at how war impacts oil and gas prices by examining some recent examples. We’ll also discuss what happens when wars end and how they can impact future oil and gas prices as well as some simple strategies you can employ to try to predict future trends in oil and gas prices with greater accuracy.

What affects oil and gas prices?

According to international law, any country may cut off oil sales to a belligerent nation. This is rarely done, because oil trade is considered vital to global peace. Countries are also unlikely to do anything that would lead oil-exporting nations to cut back production and raise prices. History has shown that when it comes to war, businesses generally focus on their own bottom line instead of worrying about world affairs. In fact, during World War II, many American companies profited heavily from German hostilities due primarily to increased demand for goods like rubber tires. Sometimes there’s truth in saying Don’t worry about it—it’s not my problem. On other occasions you may benefit by thinking beyond your business and learning how war impacts oil and gas prices—both globally and within your region. When governments fall, economies collapse and borders disappear, energy experts have realized too late that it’s time to start worrying. Because regardless of what history teaches us, if someone else controls your access to oil or gas, they control a lot more than just energy supplies. They’ve effectively seized one of the most important pieces of infrastructure we all rely on: transportation.

What drives oil and gas prices up?

The price of oil has increased dramatically in recent years, hitting a record high of $147 per barrel in 2008. While many factors affect oil prices, one of them is war. Wars can be devastating for economies and for international stability, which are both critical to global energy markets. In some cases (such as World War II), wartime oil demand is created directly by combatants. In other cases (such as current conflicts in Iraq and Afghanistan), oil drives up prices indirectly because it serves as a fungible commodity whose value rises when war-driven inflation fears spread from other sectors into commodities markets.

Oil and gasoline price trends by country

To understand how war impacts oil and gas prices, it helps to look at what happens when there is conflict in a region that supplies oil. Below is a chart showing average retail gasoline prices for selected countries for two time periods: Jan. 1, 2012 to April 2, 2013; and June 5, 2008 to Sept. 30, 2009 (referred to as Pre-War). You will see that during both time periods we see similar patterns – but also some differences – in gasoline prices when we examine all of these countries together rather than individually. The patterns largely support our thesis that oil demand drops as conflict rises: Countries with higher pre-war gasoline prices tended to have lower post-war prices.