Small fluctuations with large effects: the Sudan-South Sudan conflict and how it affects the global oil markets

First, to provide a brief and superficial review, South Sudan seceded from Sudan in July 2011, taking with it the majority of the developed oil fields but leaving all of the transportation and processing infrastructure.  The two countries need each other for both to benefit from oil sales, but late last year South Sudan shut off all oil production in response to exorbitant transit fees charged by Sudan on its crude exports.  Sudan relies on oil exports for about 70% of its government revenues, and crude sales make up 98% of South Sudan’s, so the shutoff has had serious effects on both nations.  Conflicts have erupted along the border in recent months, and South Sudan has seized an oil-rich area called Heglig that provides Sudan with half of its oil production (what remains after the split) [1].  The conflict has no resolution in sight, and many see full-scale war as inevitable [2].

Sudan/South Sudan production pre-division was around 450,000 bbl/day, all of which goes to Asian markets.  In fact, as it has recently done in other African nations, China has heavily invested in the Sudanese region, and Sudanese production made up about 5% of Chinese imports before the shutoff.  Likewise, both Sudans are dependent on China, who buys 66% of their crude.  Malaysia, Japan, and other Asian countries make up the rest (see figure below)

Image reproduced from EIA [1]

 

Because of the shutoff and conflict, among other things, the EIA has revised non-OPEC production growth forecasts downward as of March [3].  Sudanese oil accounts for roughly 0.3% of global production, but it includes a sweeter crude favored by the Asian markets.  Its disappearance has sent China, Japan, and the others elsewhere, and is believed to have driven up oil prices [1].  President Obama, in responding to the EIA forecasts, has also referenced Sudan/South Sudan as one of the causes of spikes in gasoline prices [4].  Since the US still depends heavily on imports to fulfill demand for petroleum, the global markets have a large effect on prices here [5].  Reports of the oil production shutoff began surfacing in late November of 2011, whereas the President’s comments were made in early March of 2012 [8].  It is unlikely that the price signal could have moved that quickly, except perhaps via speculation, but perception drives markets as much as anything else.

 

The President has been involved in pressuring both two sides to cease their hostilities, along with China and the UN [6] [7].  Although humanitarian issues abound, the motivations behind the international pressures are (most likely) primarily economic.  US sanctions are already in place on Sudan and have been for decades because of concerns over terrorism and human rights violations, but sanctions on South Sudan were lifted in December 2011, months after its independence [9] [10].

 

Hopefully the conflict is resolved soon.  If/when Sudanese production comes back to previous levels and begins rising again, there will be substantial effects in the Asian markets, but look for ripples that make it to US markets through links in the global trade network.

 

  1. http://www.eia.gov/countries/cab.cfm?fips=SU
  2. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=55FF-9V01-DYRV-30FP&csi=10962&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  3. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=5573-00C1-DY15-S2PH&csi=361892&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  4. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=556B-76Y1-DYRW-V54Y&csi=8039&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  5. http://www.consumerenergyreport.com/2012/02/28/president-obamas-role-in-current-gas-prices/
  6. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=55B7-H4H1-DYR8-31HG&csi=8320&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  7. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=55F0-JDT1-DYRV-333C&csi=10962&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  8. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=54C6-BWK1-JC86-C4DJ&csi=8320&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  9. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=55C9-C2N1-DYR8-30WF&csi=8320&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true
  10. http://www.lexisnexis.com/lnacui2api/api/version1/getDocCui?lni=54HF-SJM1-JC86-C12F&csi=8320&hl=t&hv=t&hnsd=f&hns=t&hgn=t&oc=00240&perma=true

 

 

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1 Comment

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One response to “Small fluctuations with large effects: the Sudan-South Sudan conflict and how it affects the global oil markets

  1. sultan316

    It’s really interesting to see how closely connected the world’s different economies and needs are. The fact that a country like Sudan plays a big role in Asian countries like China, resulting in negative effect towards the US economy and imports, is baffling. Also, before this I did not take into account that countries buy from other countries based on the sweetness of their crude.

    Something to note though might be why South Sudan decided to secede, and its incentives in doing so. Firstly, according to the secession referendum, approximately 99% have chosen they would like to split to form South Sudan, so this isn’t a matter of the few thriving over the majority [1]. This split comes as a result of the combined Arab/Muslim population in the north with the African animist and Christian south disagreeing. It was only after when they were deciding the “settlements” for each country that things got hairy. A picture of the split may be see in the source below [2].

    Last thing to note is that what could also have a large effect on the situation is the fact that the Arabs of the Middle East will feel the difference. It is with this also that prices can be affected and the US could feel even more “ripples” at home [3].

    [1] http://southernsudan2011.com/
    [2] http://www.economist.com/node/17851379
    [3] http://www.thenational.ae/news/arab-world-will-feel-the-pain-of-division-in-forsaken-sudan#full

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