Nigeria and the future of crude prices

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Almost all of the focus on crude prices has been based on falling production and rising demand from large nations like China. These forces and, perhaps, aggressive speculation, have caused oil prices to rise nearly 100 percent since the first quarter, putting the price per barrel at about $70.

The thinking behind explanations of future increases in oil prices is based on the fact that countries like Saudi Arabia are running low on oil and are not prepared to make tens of billions of dollars of investments to find and drill new fields.

On the demand side of the equation, economies like China and India are recovering from the recession more quickly than most experts had expected. And, the U.S. may start to emerge from the downturn later this year. The effects of a significant recovery would be that businesses and individuals would become larger consumers of gas, diesel, oil, and petrochemicals.

What most of these models are missing is the "event risk" of a catastrophe that would interrupt important channels of oil supply. Last year, as crude moved toward its $147 peak, any interruption or threat of interruption ticked oil up by several dollars There was a break in a Canadian oil pipeline and concerns that Venezuela might hold back oil as a way to punish the U.S. for "meddling" in its affairs.

Just beneath the surface of the front page news are reports that rebels in Nigeria are becoming more successful at disrupting production facilities there. According toBloomberg, Shell says that some of its operation will be curtailed at least until next month because "A government offensive against armed groups since May has resulted in intense fighting in the western part of the oil-producing Niger delta region." The trouble in the African nation could get worse. And there may be more turmoil in Iran where the political situation seems to become more unstable by the day.

The largest single threat to oil prices from now to the end of the year may not be economic; it may be political. That adds another very complex aspect to the formula for predicting what will happen to energy prices.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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