January 11, 2012 • Current Events, Natural Gas, Perspectives

2011: The year in energy (Part 3: Revolution!)

by Eric Bickel

Last year will be remembered in the history books as the year in which people become fed up with a whole lot of governments (mostly the dictatorship kind, while there was also this). The former was likely the largest single influence on energy markets in 2012 (at least in Europe, a little less so in the U.S.).

Often called the Arab Spring, a  wave of revolutions started in Tunisia and spread through the Middle East and Northern Africa (MENA). Some countries saw more violence than others (Libya had an entire civil war), while the civil resistance culminated in the upheaval of the Tunisian, Egyptian, and Libyan governments. Other countries witnessed progressive changes to their governments, and still others continue protests to this day (see: Syria).

When asked about the resources of the Middle East/Northern Africa, most people will come to the same conclusion: oil — and rightfully so, as it makes up a hefty portion of the regional economies. This is why we witnessed the emergence of a risk premium from the revolutions in the global oil market, which lent to the higher oil price seen in 2011. This was, however, just one of several factors pushing oil prices higher over the year. While lost oil production – mainly from Libya – was a large piece of the higher-oil-price puzzle, it mainly impacted the global product prices for gasoline and diesel. It had more of an influence on seaborne oil contracts (such as Brent) than on the landlocked contracts such as WTI (which was plagued by record stockpiles at its pricing point at Cushing, OK).

With oil squared away, let us focus on another resource: natural gas. MENA is also a key supplier of natural gas for countries such as Italy (from Libya) and Spain (from Algeria), and so natural gas also was impacted by the Arab Spring. Aside from the normal uses of natural gas (heating, mostly), the fuel source is also used for power generation. So, a lack of natural gas tends to have a bullish impact on power prices. Correspondingly, with the actions of Germany following the Tohoku earthquake, this provided a bullish influence across the Eurozone power markets for a good part of 2011, only to be negated by economic concerns to close out the year.

The revolutions seen in 2011 had a significant influence on energy markets.  We saw a good deal of volatility as the markets waited for the dust to settle, but ultimately they have a way of finding an equilibrium based on the underlying fundamentals, and 2011 proved no exception.

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