World oil prices fell under $70 per barrel yesterday following news of the death of Abu Musab al-Zarqawi, Al Qaeda's chief in Iraq, analysts said. New York's main contract, light sweet crude for delivery in July, sank by $1.32 to $69.50 per barrel in pit trading. At around 1615 GMT, the contract touched $69.10 - the lowest level since May 22. In London, Brent North Sea crude for July delivery dropped $1.02 to $68.17 per barrel in electronic deals. In afternoon trade it fell to $67.73 dollars - last seen on May 22.

While it is tempting to place all of the price drop on the fact of Zarqawi's sudden demise, there were other several factors at work, namely positive developments in negotiations with the Iranians, the release of hostages by Nigerian rebels, unexpected increase in US energy reserves, and the healthy performance of US energy stocks:

"On the geopolitical front, news today that the Al Qaeda's political leader in Iraq, Abu Musab Al Zarqawi, was killed has added to the easing of concerns over Iran," said Barclays Capital analyst Kevin Norrish. "This comes after a relatively positive reception early this week for a package of incentives aimed at encouraging the country to curb its nuclear programme." Added to the picture was news that five South Koreans taken hostage by Nigerian militants were freed yesterday, according to the Movement for the Emancipation of the Niger Delta (MEND), which had been holding them. Crude futures had already slumped on Wednesday after US energy reserves rose across the board last week, coupled with positive developments in the Iranian nuclear crisis, dealers said. (Another analyst noted that) yesterday's price falls also reflected the healthy US energy stocks data published the day before.

Complicating the calculation of the economic impact of Zarqawi's death are questions of stability and reliability. Multiplying the price drop by the number of barrels does provide a rough estimate. For example, the US imported abut 9.5 million barrels a day in March of 2006. At $1.10 per barrel, the savings are close to $10 million per day or $300 Million per month. The problem is that while the monthly extrapolation is mathematically correct, it isn't politically. Investec analyst Bruce Evers explains:

"There is a view that now that Zarqawi has been killed, the situation in Iraq will become more stable. But it is a very dangerous thing to assume." Owing to persistent violence and sabotage to its energy facilities, Iraq struggles to produce 2 mbpd, which is below the level of output before the US-led invasion of the country in March, 2003.

While it would be nice -economically, socially, and politically - if Zarqawi's death provides for a more stable Iraq, there is no way to know or predict that this will be the case. The bottom line is that oil prices could very easily move back up in the coming days, erasing much of the short-term gains. Moreover, concerns remain about industry structure and the somewhat delapidated Iraqi oil infrastructure:

Norrish added: "The killing of Zarqawi will do very little to alleviate the problems which are currently plaguing the Iraqi oil industry. "Lack of authority and sectarian disputes... will not end, while the poor state of the Iraqi oil infrastructure following from years of underinvestment will continue to keep Iraqi exports unreliable."

Only time will tell just how much Zarqawi's death is worth to the Iraqi, US, and world economies. My guess is that even if Iraqi is a lot more stable, it would take several weeks for any changes to show up at the gas pumps. Other factors would have to continue to trend positively as well. Still, this week many of the stars were aligned and for a man who has learned to take his good news one week at a time, this one has ended well.

Related post (well kind of related): A Price on Her Head

Tags: Al-Zarqawi | oil | Iraq | Zarqawi | al-Qaeda | Terrorism | gas | Gas Prices | oil reserves |

Links: Conservative Cat | The Dumb Ox | Belmont Club |