There seems to be a pattern here. When U.S. military action in Syria looks more likely, traders get nervous and oil gets more expensive. When missile strikes look less likely, prices ease back down. But why would that be? After all, Syria itself produces very little oil — currently around 60,000 barrels of oil per day, or less than 0.1 percent of the world's total.
Broadly speaking, there are three theories for why oil prices have been spiking erratically as intervention in Syria looms:
1) Markets are worried about the prospect of a wider war. One possibility, as Steve Hargreaves points out, is that there's a fear that the conflict in Syria could spread across the broader Middle East. Syria may not have much oil, but many of its neighbors certainly do:
The risk that the conflict might spread is small, but it's not zero. In particular, the Turkish city of Ceyhan, located near Syria, is a small-but-crucial pipeline terminal.
2) Markets aren't just worried about Syria. They're also fretting about Libya, Iraq, and Egypt. Another angle, as James Hamilton of the University of California San Diego explains here, is that the markets aren't solely focused on Syria. There's also a worry, for instance, that unrest in Egypt could disrupt the Suez Canal and Sumed pipeline, which carry about 3.5 million barrels of oil per day, or around 4 percent of the world's supply.
Even more significantly, recent outbursts of violence in Libya (which produces 1.9 percent of the world's oil) and Iraq (4 percent) have been cramping the flow of oil. In eastern Libya, workers and armed militias have been pushing for a bigger share of the oil wealth. The resulting protests and clashes have driven Libya's production down from 1.5 million barrels per day in April to about 150,000 barrels per day today. That's a big drop.
As the chart below from the U.S. Energy Information Administration suggests, the war in Syria has distracted us from the fact that the world has lost a lot of oil production lately from four big sources. Labor strikes and pipeline attacks in Libya, Iraq, and Nigeria have taken 1.75 million barrels of oil offline. And U.S.-EU sanctions against Iran over the country's nuclear program have put another 1.2 million barrels per day out of commission:
3) The world can't deal with minor oil disruptions as well as it used to. But there's still more to the story. After all, disruptions in the oil market are hardly new. And as the chart above suggests, the amount of oil currently offline is a bit higher than in years past, but not drastically higher.
There's something else going on here: In the old days, Saudi Arabia and other OPEC producers had plenty of "spare capacity" — that is, idle wells they could bring online rapidly when disruptions happened. The mere existence of this spare capacity was often enough to placate the oil markets.
Trouble is, Saudi Arabia may well have less spare capacity than it used to. A recent report (pdf) from the International Energy Agency estimates that OPEC's spare capacity is now just 2.2 million barrels per day — well down from the three-year average of 3 million barrels per day. This data is always a bit fuzzy, but it suggests that the world has less ability to deal with disruptions than it used to. And that, the IEA says, may help explain why oil futures are generally spiking higher lately:
The IEA estimates that recent tensions, in Syria and elsewhere, have boosted the price of oil by about $9 per barrel. That would typically translate into a gasoline price increase in the United States of around 22 cents per gallon.
Another way to think about the recent oil jolt is through this rule of thumb by the U.S. Energy Information Administration: A sustained $10 increase in the cost of a barrel of oil is estimated to shave about 0.2 points off GDP growth in the first year alone. So higher spikes could certainly start to matter economically.