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The Middle East Is Ablaze, but Here Is Why Oil Prices Are Cooling Off

Photo credit: The U.S. Army via Flickr

This week clashes between rival militias in Libya caused an out of control fire at the country's largest fuel storage facility. Firefighters were just about to finally extinguish the blaze at the first tank that was hit, but then fighting in the area intensified and another tank burst into flames. Flaming petroleum, however, is the least of the country's problems as escalating violence led to 97 lives being lost in the past week alone. Sadly, the flare-up of violence in Libya is just one of the many areas of the Middle East that remains inflamed in conflict.

A region inflamed
Fighting between Israel and Gaza has also boiled over again. Since the most recent conflict began more than 1,000 Palestinians and 46 Israelis have lost their lives. Further, despite a strong statement from the U.N Security Council for an "immediate and unconditional" ceasefire as well as a major Muslim holiday, there have been no signs that a truce can be had as rocket and missile fire continues to be exchanged. There is no telling when the latest violent flare-up will be extinguished. 

Then there is the violence in Iraq as the militant group ISIS has taken control of parts of the country. Most recently the group has waged a war on holy places as it has destroyed the tombs of noted Biblical characters Daniel and Jonah. Militants have also threatened to kill Christians that don't either convert to Islam or pay a special tax. But the group has issued more than just threats as so far this year it is estimated that ISIS has taken the lives of 5,500 civilians in just the first six months. That's on top of the 7,800 lives lost last year in the country at the hand of militants.

Despite the violence, oil prices are cooling down
Typically when violence flares up in the Middle East it is a good excuse for oil prices to heat up as well. Last summer Syrian violence caused oil prices to spike to a two year high of more than $115 per barrel. This was despite the fact that Syria produced little oil of its own. The worry there was that Syrian violence would inflame the whole Gulf. If that happened the worry among oil traders is that it would have caused the price of oil to spike to as high as $150 per barrel, which could have had a big impact on the American economy.


Photo credit: L.C. Nøttaasen via Flickr

Further, when violence in Iraq flared up earlier this year, the price of oil also shot higher to $114 per barrel. The worry there was that if violence spread to the major oil producing regions of the south it could push the price of crude up to more than $125 per barrel.

That's why it's surprising to see that oil prices have actually been heading lower of late. Even after the latest violence in Libya, which is a major oil producer, the price of globally benchmarked Brent oil slipped to under $108 per barrel. Meanwhile, America's crude oil benchmark price fell to less than $102 per barrel.

What changed?
One of the reasons why the price of oil isn't being affected by the most recent Middle East flare-ups is because the Middle East is no longer the only game in town when it comes to oil. Surging crude oil production from North America is really helping to dampen the effect these flare-ups in the Middle East are having on oil prices. It's also the big reason why American oil currently trades at about a $6 per barrel discount to world oil prices.

America overtook both Saudi Arabia and Russia a few months ago to become the world's largest oil producer as production now exceeds 11 million barrels per day. That's only expected to grow as America's oil output should reach 13.1 million barrels per day before the end of the decade. Thanks to shale basins in Texas and North Dakota, America is expected to lead the world in oil production through the start of the 2030s. Because of that these flare-ups aren't causing the huge oil spikes that we had been used to seeing and while we are not completely immune to Middle East violence, we've at least lessened its impact on oil prices.

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Matt DiLallo

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries:

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