I’m working from home today, scanning some British papers. And according to members of the British government quoted in London’s Daily Telegraph, the U.S. is now gearing up for an “inevitable attack†on Iran to destroy its ability to develop nuclear weapons.
What do you think another conflict in the Persian Gulf will do to oil prices? Wall Street used to see $100 oil as a worst-case scenario. Now, that “worst case†might be far too low.
Already, the ongoing civil war in Iraq involves three countries with the richest conventional oil reserves in the world — Iraq, Saudi Arabia and Iran. And already, it’s pretty well known that the Iranians are backing the Shiites in the civil war.
What’s not so well known is that the Saudis and Syrians are backing the Sunnis.
The likelihood of multiple wars breaking out across the Middle East grows greater every week. A U.S. attack on Iran, if it comes, will be a grenade tossed into a gasoline pit. And all this at a time when oil prices are already under pressure …
IRAQ: The Middle East’s poster child for Armageddon is sitting on 115 billion barrels of proven reserves. It pumped 3.5 million barrels per day (bpd) of oil before the first Gulf War. Now, it can only manage an estimated 1.7 million bpd, according to the Oil & Gas Journal, with only 1.1 million of that exported.
No one really knows for sure — production isn’t monitored and virtually anyone who tries to audit production is at risk of being killed. But it’s safe to assume a lot of oil is lost to corruption and sold illegally to fuel the ongoing civil war.
Now, as conditions in that blighted country deteriorate, pipelines are blown up so often they’re becoming difficult to patch. Over and over again, they get hit. Repeatedly, repair workers rush in.
And despite the big expenses and huge losses, it seems to never end.
IRAN: The heirs to the Persian Empire have enough money to develop a new 223-mph torpedo (using stolen Russian technology), and they’ve just successfully tested it in the Strait of Hormuz, where 40% of the world’s oil travels via tanker.
But they apparently don’t have the money to spend on upgrades or even ordinary maintenance of their oil infrastructure. As a result, Iran, which claims to be sitting on 132 billion barrels in oil reserves, is seeing its oil production spiral lower.
Iran can’t even meet its OPEC production quota of 4.11 million barrels per day. Indeed, Iran’s existing oilfields have a natural annual decline rate estimated at 8% to 13%. That’s 300,000-500,000 barrels per day of production — lost each year. And in February, another 40,000 bpd was chopped off Iran’s production as two offshore fields were shut down.
KUWAIT: This country’s state-run oil company acknowledged that the production of its Burgan oil field has peaked. That means they can’t increase production, and a slide in output is sure to follow. Burgan was one of the world’s largest, though an internal Kuwait Petroleum Corp. document cut estimates of Kuwait’s oil reserves in HALF, to 48 billion barrels from 99 billion.
This shouldn’t be a huge surprise; the Burgan has been pumping oil for 60 years.
SAUDI ARABIA: The “central bank of oil†seems to be healthy on the surface. And on March 23, the Saudis officially opened their Haradh oilfield project four months ahead of time. It is pumping 300,000 barrels per day, and pumping at full output capacity.
Pretty good. Except the Saudis need to pump over 500,000 barrels of seawater a day to maintain high pressure. That’s a lot of water! So it’s not exactly coming up easy.
Meanwhile, Saudi Aramco, the state oil company, is officially expanding its oil rig fleet by 100% over a two-year period, going from 55 to a planned 110. Unofficially, I hear they plan to go as high as 120 ASAP. Aramco is adding plenty of offshore “jackup†rigs, laying down obscene amounts of money to buy up existing contracts of rigs-for-hire.
Drilling for oil under water is very expensive. You’d expect the Saudis to be drilling out their cheapest oil first. Don’t they have a desert full of this stuff? So why are they willing to pay a premium to drill for oil off shore? I’d say it’s because the exhaustion of desert oil reserves is probably a lot closer than the Saudis would have you believe.
Meanwhile, al-Qaeda operatives were stopped recently from taking out a Saudi oil facility with a car bomb. But this is just the latest in a string of attacks, and it won’t end any time soon. One day, the bad guys might get lucky.
THE NORTH SEA: Drilling activity is going up, but production is going down, dropping from 4.5 million bpd in 1999 to just 3.3 million bpd today. And the rate of decline is getting ominously steeper.
NIGERIA: About 27% of that country’s oil output was knocked offline by rebel attacks. The government has deployed new Chinese-made patrol boats to secure the areas under siege and is offering peace talks with the rebels. But, at best, that truce will only hold up as last September’s, which soon collapsed.
Meanwhile, Royal Dutch Shell is not impressed, refusing to send workers back to abandoned oil fields. About 65% of Nigeria’s roughly 36-billion barrels of crude is light and sweet — perfect for making into gasoline. Too bad guerilla war is probably going to take even more of it off the market.
MEXICO: The really bad news is our neighbor to the south.
Its giant Cantarell oil field — which produced 63% of that nation’s total crude oil output in 2004 — has gone into irreversible decline. As a result, Cantarell’s output may fall 6% this year and 30% by 2008.
Mexico says it will make up for the production with other fields, but since 60% of the state oil company’s revenues are taxed away, it can’t even afford to buy steel pipes. Good luck with that!
OPEC Is Dancing
As Fast as It Can
The OPEC cartel meets in June, but don’t expect more production. Qatar’s Oil Minister, Abdullah al-Attiyah, recently told reporters:
“Even if [oil] reaches $70, what can we
do? We are doing all that we can do.â€
OPEC members are planning to spend $100 billion to increase output by 17% over the next 10 years.
BUT … the U.S. Energy Department expects world oil demand to rise by 32% over the next nine years. That would be 103 million barrels of crude per day — about 23 million barrels more per day than can be produced right now.
Even if OPEC meets its ambitious production goals — don’t hold your breath — where is the extra oil going to come from?
Russia? Its fields are a study in neglect and waste.
Canada’s oil sands? I dealt with that in a previous Money and Markets — the production simply isn’t there.
Venezuela? They hate us, and anyway, they’re seizing foreign-owned facilities, while making plans to sell production by the tanker load to the Chinese.
As I look out at these dark clouds gathering over the oil industry, I can’t help but think about an earlier time — more than 2,000 years ago — when another oil empire was threatened by war …
An Earlier Time of Oil,
Toil, and Trouble …
I’m a history buff. So I love a story I came across about the Nabataeans, aka “the Oilmen of the Dead Sea.†Like today’s oil story, it’s a saga of war and greed.
The Nabataeans built a kingdom in the 4th to 3rd centuries BC that spanned from northwestern Saudi Arabia to Syria. Their trading routes went even farther. More than a thousand years before Columbus went looking for a passage to India, the Nabataeans sailed longer distances — all the way to Southern India.
The Nabataeans’ capital was Petra, (“rock†in Greek), a city carved out of stone that you may remember from the movie “Indiana Jones and the Last Crusade.â€
Oil, along with a lock on the lucrative spice trade, made the Nabataeans so wealthy, explains Dr. Zayn Bilkadi, that “they are the only people in history known to have imposed a punitive tax on whomever among them grew poorer instead of richer.â€
Oil Wealth Breeds Jealousy
As in present times, oil wealth bred jealousy. The Greeks sent an army to drive the Nabataeans away from their oil patch. The general leading the Greeks was Hieronymus — the famous historian — and he described what he saw on the shore of the Dead Sea: Scores of tribesmen camped on the shore next to reed rafts, waiting for what they called the thawr — the word was Arabic for “bull†— to appear in the middle of the sea.
The “bulls,†Hieronymus discovered, were great iceberg-like mounds of tarry crude oil — bitumen — that floated up from the depths of the Dead Sea. These giant chunks of floating asphalt were found after storms, which dislodged the tar from the bottom.
When the thawr reared in the waters, the tribesmen leapt aboard their rafts and paddled furiously after it. They chopped pieces of the tar off with axes, loaded up their rafts, then headed back to shore.
Sprinkled with sand, the tarry mess would then be taken by camel-back to Egypt for use in sacred mummification rituals. Since everyone who was anyone in Egypt had to be mummified, demand for the thawr-oil was very high.
Hieronymus and his troops were under orders to drive the Nabataeans away from the oil-strewn shores and secure the prize for the Macedonians. However, Hieronymus was a better historian than a general, and he had his head handed to him. His army was attacked by 6,000 tribesmen and massacred in a hail of arrows, while Hieronymus himself was forced to flee for his life.
Over the centuries, the immense wealth of the Nabataeans attracted one would-be conqueror after another. For a while, they crushed their enemies, but when the enemy armies became too large, they started buying off potential adversaries with silver. This only made their enemies eye them more greedily.
Lessons We Can
Learn from History
1) Scarce resources breed war. We saw it with the Nabataens centuries ago, and we see it in the Persian Gulf today.
And in addition to shooting wars, other conflicts abound. Right now, for example, America is in a great three-way race for resources with India and China.
I find it disturbing that we flounder along without a real national energy strategy, while those two countries are racing around the globe sewing up one deal after another. If the oil pits of the Middle East hit a flash point, the lack of a solid energy strategy could be America’s Achilles heel.
2) We CAN get out of the oil trap. Egyptians absolutely “had to have” the thawr-oil. Similarly, Americans and the rest of the Western world today seem addicted to crude oil. There are alternatives out there, but time is running short for us to start making the transition.
My advice: Prepare for that day. It won’t hurt your portfolio either way. Here are two ways to do it …
Two Picks for the
Coming Oil Crunch
For a diversified mutual fund, look at US Global Investors Global Resource Fund (PSPFX), stuffed with great companies including Petroleo Brasileiro, Valero Energy, National Oilwell Varco, and more.
It has no load. It returned 72% last year and is up 17.35% year-to-date. It has a total expense ratio of 1.3% — lower than the category average — and gets a four-star rating from Morningstar.
For an individual stock — well, you might want to take a tip from history and invest in something that will be around even after the Empire of Oil. Pacific Ethanol (PEIX) has already had a great run, but it recently broke out to the upside after consolidating for two months.
I think it could easily run up as high as $34.5 — a 57% move from recent prices. The government is throwing money at alternative fuels like ethanol, and Pacific Ethanol is one of those stocks that should make the most of it.
As some empires slip, others rise. That’s why I like to look at the resource-rich countries of Canada and Australia, which are only beginning to exploit their wealth.
The energy picks in my Red-Hot Canadian Small-Caps portfolio are doing very well indeed!
That service is sold out. But I’m already targeting Asian and Australian picks for Red-Hot Asian Tigers — stocks that are tapping into the next generation of energy. If this intrigues you, call 800-898-0819 for more information.
Best wishes,
Sean Brodrick
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About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Jennifer Moran, John Burke, Beth Cain, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
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