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OIL
AND GEO-POLITICAL RISK Oil prices are likely to remain under pressure. In mid-October prices reached new records, reaching over $90 on October 22nd and pushing toward the $100 a barrel mark. The main reason for this is the rise of political tensions in the Middle East, with Turkey threatening to send its troops into Iraq to punish rebels from the Kurdish Workers Party (PKK). The PKK has sought the creation of an independent Kurdish state or carving out greater autonomy within Turkey. What complicates matters is that Iraqi Kurdistan is the only part of Iraq that has worked out elective politics, a functioning economy and some degree of law and order -- unlike the rest of the civil war-torn country. It has also been pro-American and willing to remain a part of Iraq, albeit with considerable autonomy and its own military. However, the inability of the Iraqi Kurdish authorities to control the PKK from using bases to launch attacks against the Turkish military is now becoming a major problem, especially as the conflict is intensifying. This has left the Iraqi government calling for negotiations with Ankara and the U.S. pressing for restraint. Considering that U.S.-Turkish relations are already at a low point over the probability of the U.S. Congress passing a resolution condemning the Ottoman Empire for genocide against the Armenians in the 1910s, the Kurdish mess represents a very tangled web of issues not easily resolved. The bottom line worry is that any conflict involving Turkey, the Kurds and Iraq could disrupt oil production in the Middle Eastern country as well as leave pipelines in Turkey open to sabotage. While the Turkish-Kurdish-Iraqi issue is shaking oil markets, it is hardly the only factor on the geo-political agenda. Iran remains very much at loggerheads with the United States over the nuclear issue, Israeli-Syrian relations are tense following the former country's raid on the latter country's fledgling nuclear program, and Pakistan's political situation is exceedingly more volatile. The last was evident on October 18th when two bombs exploded in Karachi in an effort by Islamic militants to kill the returning Benazir Bhutto. She is reviled by Islamic hardliners for having a moderate view of Islam and maintaining relatively close ties to the Bush administration. Should oil prices be heading toward $100 a barrel? Probably not based on economic and market fundamentals, but the risk premium is not going away anytime soon. Without the geo-political tensions as well as speculator money, oil would probably have settled into a much lower and comfortable number. Consequently, we would not be surprised to see prices head closer to $100 a barrel before they go to $60.
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