Why the Algerian Hostage Crisis is Driving Oil Prices

The ongoing Algerian hostage crisis illuminates the dangers of working on an oil rig in a third-world country. It also underscores the highly sought after nature of the world’s limited oil supplies.

That last sentence is why oil prices have risen sharply in the roughly 72 hours since Islamist militants took hundreds of people hostage at a remote gas drilling facility in Algeria.

It’s indelicate to discuss the investment implications of any one situation in which innocent people’s lives are at stake. The direction of your oil investments seems trivial compared to the fate of oil workers being held hostage by violent kidnappers.

But there’s no denying that the Algerian hostage crisis shows how vulnerable oil and gas drilling areas can be. It also reveals the lengths to which extremist factions are willing to go to expose those vulnerabilities.

Oil is precious – that’s the message the situation in Algeria is sending some energy investors. You never know when a major oil reserve will suddenly be compromised.

According to the Financial Times, Algeria is the ninth-largest gas producer in the world and the fifth-largest exporter. The In Amenas field that was attacked produces 9 billion cubic meters of gas per year – 18% of the country’s total gas exports. This field is a major hub in one of the largest gas-producing nations in the world.

That’s why oil prices have surged 2% since Wednesday, climbing to a four-month high of $96 earlier this morning. The more vulnerable these large-scale oil and gas drilling facilities appear, the more valuable those commodities become. Investors are driving up oil prices out of fear that at any moment the world’s oil supply could essentially be reduced if it falls into the hands of an extremist group.

Consider: seven of the world’s 10 largest oil-exporting countries are either in north Africa or the Middle East – not far from Algeria. All of those areas are vulnerable to terrorist attacks. Some of those countries – Iran, Iraq, Nigeria – are far more hostile oil-drilling areas than Algeria.

As Barclays commodities analyst Helima Croft told the Financial Times, “Algerian energy facilities had largely been viewed as immune from this type of violence. … (I)f it can happen in a place like Algeria, you have to be concerned about facilities across north Africa and the Sahel.”

If nothing else, the Algerian hostage crisis has shined the spotlight more directly on such dangers. This may be an isolated incident. But the fear of future takeovers is warranted.

That fear is likely to drive oil prices up even further in the coming days.