Unrest in the middle east has caused oil prices to soar but risk appetite to fade. At the first glance, it certainly is tempting to say that what is good for the oil price is good for Russia. That certainly is the first order effect, but there are other consequences as well.
The rise in the oil price is not induced by a shortage of oil in the world. Indeed, if we ignore rumors of uncertain reliability in Saudi spare production capacity, there is substantial unused global capacity in oil production. It seems that the oil price reflects expectations of a very significant supply disruption – something more than a temporary decline in oil supplies from Libya, Egypt, Tunisia and Yemen. The current oil price thus includes a risk premium for a spread of middle east unrest to Saudi Arabia, Iran, Iraq or some combination of one of more of these nations. Granted, such as spread
could have significant negative influence on oil supply.
This sense of overall increased risk has a number of side-effects aside from an increase in the oil price. Increased risk perception causes increased risk aversion followed by a decrease in investment in riskier assets, such as stocks, which then decrease in price. This increased risk perception has caused some weakness in international equity markets ex energy sector, although a strengthening of the oil price and the ruble has muted this effect in Russia.
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