The Call

The top red herring of 2013

To understand how the world is changing, it’s not enough to identify the risks most likely to move markets. We also have to point out the threats we think are significantly over-rated. Eurasia Group calls these its "red herrings." The most important for 2013 is centered on the intersection of political risk and energy prices. ...

PATRICK BAZ/AFP/Getty Images
PATRICK BAZ/AFP/Getty Images

To understand how the world is changing, it’s not enough to identify the risks most likely to move markets. We also have to point out the threats we think are significantly over-rated. Eurasia Group calls these its "red herrings." The most important for 2013 is centered on the intersection of political risk and energy prices.

Political and security worries in and around oil exporting countries have put a lot of pressure on energy prices over the years, but despite the continuing upheaval in the Middle East that we highlighted in Top Risk #3, we don’t expect this will be a year of geopolitical risk for energy markets. 

In part, that’s because the worst of this year’s regional turmoil is likely to center on Syria, its neighbors, and North Africa rather than the major energy exporters. The pressures on Iran continue, of course, but with sanctions in place and little appetite among outsiders for another Middle East conflict, the likelihood of major military action and an Iran-related energy shock is exaggerated — at least for 2013. And, of course, a lot of Iran’s energy exports have already come offline.

More important is the supply-side of the equation. Technological breakthroughs in production in the United States and Canada are a game-changer for the entire global energy market, reducing imports into North America and alleviating unease about supply scarcity. In years to come, new fossil fuels will come increasingly from these two countries as well as from stable developing states like Brazil and Mexico. That’s good for consumers around the world, because even a modest economic recovery isn’t generating overwhelming demand growth — and tighter fuel efficiency standards and shifts in consumer behavior are adding to the bearish price outlook.

On the other hand, this is not good news for poorly governed resource-rich countries like Russia and Venezuela, which need relatively high energy prices to provide crucial state revenue and keep their economies in gear. Five years ago, Russia needed an oil price of just $34 per barrel to balance its books. In 2012, that number was about $117. The already wretched state of oil-export-dependent Venezuela’s economy forced a currency devaluation last week.

As we’ve written, there are plenty of serious political risks in 2013, but a political risk-inspired surge in energy prices won’t be among them.

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