Yemen crisis increases oil price volatility

Yemen crisis increases oil price volatility

Instability over Houthi insurgency and Saudi air strikes in Yemen have caused increased oil price volatility. It is fair to say that instability will continue in Yemen for some time and that there might be unexpected alliances as matters settle. 

The price of oil jumped nearly 5 percent when Saudi Arabia and its GCC allies began air strikes over Yemen to counter the gains of Houthi rebels on March 25. The Houthis had not only taken control of Sanaa, Yemen’s capital, but were also moving towards the southern port city of Aden where Yemen’s elected President Hadi had taken refuge.

Some two weeks later, oil dropped 1.9 percent after a successful nuclear framework agreement with Iran was announced in the P5+1 talks. It was assumed that Iran would soon be free of oil sales sanctions.

Growing oil price volatility due to political risks is worth exploring further because speculation based on conditions in Yemen had such a weak basis.

First off, Yemen itself is not a big oil producer. Its 2013 production of 133,000 barrels a day only marked it as the 39th largest producer in the world. However this was down from a peak of 440,000 barrels in 2001, and since the 300,000 barrels lost to security issues and well maturation made little impact, it is unlikely that the remaining production would have an effect on prices.

While most agree that Yemen is a small producer, they argue that the Bab el Mandeb chokepoint off Yemen’s coast is the real issue since 3.8 million barrels pass through it on the way to or from Egypt’s Suez Canal or SUMED pipeline. This reflects about half of the oil transported between the Red Sea and the Mediterranean via Egypt.

Any blockage of this chokepoint would force tankers from the Persian Gulf, Europe, or North Africa to take a longer alternate route on the way to Asian markets. This would raise costs and delivery times.

Another fear is that the conflict could spill over and disrupt activities in Saudi Arabia. Some also contend that the confusion or fog of war could provide cover for pirates and increase their activity.

However, while it is wise to maintain the security of the world’s chokepoints, Bab el Mandeb has not been compromised during Yemen’s civil wars or during the Houthi insurgency from 2004-2010.

Moreover virtually all of the political actors that are parties to conflict in Yemen are dependent on oil revenues to maintain their power. Hadi’s exiled government and the Houthis will both require oil revenue to run the Yemeni state. Iran and Saudi Arabia require oil revenue to fund these clients and other state projects. Even Al Qaeda in the Arabian Peninsula (AQAP) is dependent on the oil income of their benefactors.

The concern about spillover into Saudi Arabia also seems a stretch. When Houthis hid in the mountains along the Saudi border during their insurgency against the Saleh government, the Saudi air force wiped them out. They also wiped out civilian Houthi villages south of the border.

Similarly, while pirates from northern Africa could try to attack shipping their firepower would be no match for the de facto Houthi government or the Saudis. There is no real hazard.

A quick glance at the volume of oil transported through Bab el Mandeb is less than determinative. It is roughly equivalent to the oil shipped directly through the SUMED pipeline or the Suez canal, and pales by comparison with the volume at the Strait of Hormuz or the Strait of Malacca.

Volume of crude oil and petroleum products transported through world choke points 2009-2013

Volume of crude oil and petroleum products transported through world choke points 2009-2013

Since the speculation about Yemen came at a time when oil prices dropped dramatically in response to the glut of supply generated by U.S. shale oil and strong Saudi production it could even be that these large inventories would make up for losses from Bab el Mandab, while any blockage was being cleared.

Instability in Yemen linked to the Sunni-Shia conflict

Some of the speculation about the impact of instability in Yemen could also be linked to the broader implications of a regional Sunni-Shia sectarian conflict led by Saudi Arabia and Iran. This too is inaccurate.

There has been little sectarian conflict in Yemen because the Houthis, as Zaydi Shia are quite close to Sunni Islam in practice. The Zaydi are “fivers” or follow the teachings of the fifth imam, while the Iranians follow the twelfth imam. Zaydis do not believe in the infallibility of imams and actual follow a branch of Muslim jurisprudence much closer to mainstream Sunni Islam. In fact, one report has noted that a large number of Sunni Yemenis are backing the Houthis in opposition to the regime.

The political landscape in Yemen has been very fluid for some time and turns on matters other than religion. For instance, former President Saleh was a Zaydi Shia just like the Houthis. However, in the wake of 9/11 he was cooperative with the U.S. while the Houthis first demonstrated against him and then mounted an insurgency.

The Houthis joined others in opposing Saleh during the 2011 revolution, but left the National Dialogue mediated by the GCC countries over the amnesty granted to Saleh in return for his resignation. When President Saleh was replaced by President Hadi, who had been his vice president, the Houthis remained in opposition.

Hadi, who had been a major figure in the military of the communist state in South Yemen prior to the formation of a single Yemeni state, had value in reaching secular populations and others in the South. Many resented the Saleh administration’s favoring of the north in goods and services over the south.

Presidents Saleh and Hadi were both cooperative with U.S. efforts to combat terrorism and particularly AQAP. The Saudis liked this position because it guaranteed security to their south.

Iran has sponsored the Houthis since they controlled much of the north and offered a means to expand Iranian influence. The Iranians have also made largely unsuccessful overtures to the discontented, largely secular, southerners for the same purpose.

It is fair to say that instability will continue in Yemen for some time and that there might also be unexpected alliances as matters settle. One source has even speculated that any Houthi government might make overtures to the Saudis to obtain needed resources.

About Author

Lawrence Katzenstein

Lawrence Katzenstein has taught at the University of New Orleans and the University of Minnesota. Through an affiliation with the Humphrey Institute he was one of the trainers for the initial Chinese WTO delegation. He has been an exchange professor at the Consolidated Universities of Shandong Province and an embedded social scientist with the U.S. Army in Iraq. He earned a B.A. in political science from CCNY and an M.A. and Ph.D in political science from Rutgers University. While at the University of Minnesota he also completed a teaching post doc in International Business.