Could the Algerian Hostage Crisis Have Wider Ramifications on Oil Prices?

4 minutes, 18 seconds Read

In short …. Probably not.

Earlier this week the world looked on as the bloody four-day standoff at the In Amenas gas plant drew to a dramatic close. Its tragic events left many in the energy sector reeling about political instability and security in the region.

On Thursday last week, the Financial Times reported that ‘crude oil and European gas prices had firmed as the attack by militants on the gas plant in Algeria raised uncertainty about the future of one of leading suppliers of energy to the region’.

Traders started to worry about increases to oil and gas prices as some supply issues started to surface.

According to the North Africa Post, fears were mounting that security costs will ‘skyrocket’ making the region less attractive to invest in. In an article by the newspaper on Tuesday, it claimed companies had already evacuated their staff and were watching developments very closely.

Online, there have been numerous reports indicating the attack has led to an increase in the prices of oil. One energy analyst has been reported as saying this week that the violence at the gas plant had “put a geopolitical risk premium into pricing”.

These dramatic events come on the tail end of the ongoing instability within the Middle East-North Africa oil producing region, which has already experienced two turbulent years of national demonstrations and wars following the fallout from the Arab Spring.

So why shouldn’t the events of last week have wider ramifications on oil prices – particularly when we saw on Thursday that the WTI price for a barrel rose to over $96.04, its highest price in four months and Brent crude oil finished higher last week for the fifth time in sixth, reaching $111.89 a barrel?

Figure 1: WTI Vs. Brent, graph created by ZEMA


Before I get to that, here are some quick facts:

Algeria is the eight-largest gas producer according to the US Energy Information Administration (EIA). It’s also the number three supplier to the European gas market, accounting for 11 per cent. Amenas gas plant – a wet gas field operated through a joint venture by Statoil, BP and Algerian state oil company Sonatrach – produces 9 billion cu m of gas per year.

According to the Oil and Gas Journal, Algeria held an estimated 12.2 billion barrels of proven oil reserves as of January 2012 and has the third largest reserves in Africa behind Libya and Nigeria. Its biggest international importers by a mile are North America and Europe.

The events from last week may have had some impact in the spike in WTI prices last week. However linking any future increases in the price of oil to what happened in Algeria could be premature. For instance, isn’t it more likely that the ongoing events in the US regarding the Keystone XL Oil Pipeline have more of an impact on WTI prices? President Obama has been holding off on making a decision on the pipeline in recent times. However, pressure is mounting. Earlier this week  we saw Governor Dave Heineman giving his backing to the routing plan for the state of Nebraska.

Similarly with Brent crude oil, it’s a lot more likely that upward prices could be attributed to the continuing rise in demand by the Chinese and OPEC reports of lower supplies. Continuing sanctions led by the western Governments on Iranian state companies in the oil and gas industry could also be contributing to this.

When taking these factors into account while also recognizing that Algeria will continue to be a serious player in the market … it leads me to believe that investors won’t be bowing out of the North African country just yet. The reality is, is that however traumatic and awful the events of last week may have been, it might be business as usual as the industry moves on from this crisis.

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