With the prospect of international intervention in Syria becoming increasingly certain, oil prices have once again breached the $110 a barrel-mark and are showing no signs of cooling down.

Historical price data for Dubai grade crude from the Arabian Gulf show that strife in the world’s chief oil-producing region makes the commodity a profitable play for investors in the near term. But things mostly tend to settle down after the initial panic over supply security.

What needs to be kept in mind is that the Syrian oil output has shrivelled to just 50,000 barrels a day at present from 3,50,000 barrels in March. At its peak, it accounted for less than 0.5 per cent of global oil supply. What is more, sanctions were imposed against the country in 2011 that barred it from selling its oil internationally.

Fear of conflict

As such, the factor driving crude oil prices is not concerns of a disruption in supply from Syria, but fear that if the conflict grows any bigger, there is a significant risk to other assets produced in the region. This is of great concern to India, which is already combating sharp currency depreciation and a huge fiscal deficit.

The outbreak of the Gulf War in Iraq in August 1990 almost resulted in the undoing of India’s macroeconomic balancing act, with a 125 per cent rise in the price of Dubai grade crude in just two months posing a serious challenge from the balance of payments perspective. But thereafter, prices witnessed a sustained cooling down and fell, below the levels seen at the start of the conflict, by January 1991. A similar situation emerged prior to the Second Gulf War. In the four months leading up to the American invasion of Iraq in February 2003, crude prices rose 44 per cent. But when the invasion commenced in March, prices tanked to $20.26/barrel, recording a slight recovery to $25.25 by the time the US-led forces emerged victorious in May.

Following the Iraq conflict, oil prices rose steadily to $70/barrel up to mid-2006 and subsequently crashed to $49.39/barrel in January 2007.

But immediately thereafter, they rose to an all-time high of $141.33 on July 15, 2008. Following the outbreak of the global recession, they tanked to $34.68/barrel. After remaining largely range-bound at $60-80/barrel over the next two years, crude oil prices began to climb again in August 2010. When an uprising broke out in Tunisia in December 2010, oil was trading near $90 a barrel. Over the next three months, as civil unrest erupted into full-blown civil war in Egypt, Libya and Syria in what is known as the Arab Spring, oil prices climbed further, breaching the $100/barrel level in February 2011. They touched $118.98/barrel in April 2011, but then withdrew. Nevertheless, barring a dip in May 2011, the price remained above $100/barrel.

Restricted movement

Price movement has been restricted for much of the past year, but with the conflict in Syria escalating, it has once again begun to rise sharply. From $97.75/barrel in June, oil has now crossed the $110/barrel-mark and the Dubai grade is currently trading at $111.84/barrel.

> arvind.jayaram@thehindu.co.in

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