The Next Huge Oil Strike


Oil prices are now hovering near $100, now that the world seems relatively stable: Egypt and Libya are out of the news, Osama bin Laden is dead, and Iranian President Mahmoud Ahmadinejad will not be chairing the next OPEC meeting. However, sky-high oil prices are not as far off as you may think. Sparks flying among the large Middle Eastern oil-producing nations could send prices soaring for years to come.

Two weeks ago, my colleague David Lee Smith warned Fools to carefully watch the story unfolding in the Middle East. Should the U.S. leave Iraq in December, Iran and Saudi Arabia could begin to vie for power and influence in the region. Iran has been active in trying to influence the region recently, and Saudi Arabia and other countries are getting antsy. Just last week, The Wall Street Journal reported that Saudi officials have been talking with other Muslim nations to join an informal Arab alliance against Iran. Some analysts worry that more nations could be pulled into troubles between the two Arab powers.

Why this matters
Chaos and unrest have a much larger effect than most people realize. When large oil powers go through chaotic times, a significant amount of their oil-producing capabilities is lost for years. Often, these countries never return to the production levels they had before chaos started.

Let’s examine the historical data:

Country

Year

Event

Pre-Event Production (MMB/d)

Production Low Point (MBB/d)

Recovery Level (MMB/d)

Years to Recovery

Iran 1979 Revolution 6.0 1.3 3.5 15
Iraq 1980 Iran-War 3.5 1.0 3.0 10
U.S.S.R. 1989 Collapse 12.0 6.0 10.1 20
Iraq 1990 Gulf War 3.0 0.5 2.5 10
Venezuela 2002 PDVSA strike 2.8 1.2 2.6 9
Iraq 2003 Invasion 2.5 1.4 2.5 8
Libya 2011 Revolution 1.6 ~0.4

Source: ARC Financial, U.S. Energy Information Administration.

Iran and Iraq in the early ’80s provide interesting examples. The Iranian revolution of 1979 followed by the Iraq invasion in 1980 caused Iran’s oil production to drop nearly 80%. The invasion cost Iraq dearly as its production dropped 70%. It took Iraq a decade to return to a level near where it was at before the war. In Iran’s case, it took 15 years to return to a level 40% below its prior production. It has not been able to produce more than 4.2 MMB/d since.

More recently, Libya has so far lost roughly 75% of its daily production of 1.6 million barrels of oil per day. Using the past as an example, Libya’s oil-producing capabilities will not have an effect on the world markets for years to come.

Why this happens
In any war-like situation, you might expect pipelines, wells, and other necessary infrastructure to be destroyed. However, the damage is much broader. The “brain-drain” of experienced workers fleeing the country is a large factor in the loss of production. Skilled workers aren’t apt to quickly return, and replacements are hard to come by for a country that has just (in the past five years) gone through chaos.

Beyond that, functioning governments take time to rebuild, and money for new projects is hard to find, as investors demand huge returns for the high perceived risk of the nation. It took nearly seven years for the Iraqi government to auction off some of its oil fields to ExxonMobil (NYSE: XOM  ) , Royal Dutch Shell (NYSE: RDS-B  ) , and BP (NYSE: BP  ) and that was with the U.S. working feverishly to protect Iraq’s oil assets during the war. I doubt you will see Total (NYSE: TOT  ) or ConocoPhillips (NYSE: COP  ) returning to Libya anytime soon after losing most of their investment in the country.

The possible future
It is a big “if,” in terms of if the big Middle East three fall into chaos, but it’s still worth pondering what could happen:

Country

Current Production

Low Point?

Saudi Arabia 10.5 MMB/d ?
Iran 4.2MMB/d ?
Iraq 2.5MMB/d ?

Source: U.S. EIA.

While we can’t know the future for sure, it’s good to follow the Boy Scout motto of “be prepared.” If any of the three were to be affected, particularly Saudi Arabia, oil prices would skyrocket for years.

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About todaysawareness

The site, “beawaretoday”, is a unique prospective, as if looking down from 30,000 feet at the world of Local, National, and Foreign Affairs. Most people go through each day only seeing what is immediately affecting them and most only have a vision for dealing with their issues of only about 5 to 7 days. With, “beawaretoday”, we look at what is happening around the World and what I call the Domino Effect, to project problems that are forthcoming so that people can plan ahead to deal with them vs. dealing the alternative. I created the blog, “beawaretoday” so that I could share a forum to discuss, Current, Domestic and Foreign Affairs that affect us all through the Domino effect. I encourage you to join the Discussions or at least enjoy reading the content. Thank you, Tom Campbell
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One Response to The Next Huge Oil Strike

  1. Lance Denney says:

    Problem when you re-post a posting by Motley FOOLS or anyone else, you have to give them credit. Plagerism leaves a bad taste… The Next Huge Oil Spike – Fool.comJun 3, 2011 … Two weeks ago, my colleague David Lee Smith warned Fools to carefully watch the story unfolding in the Middle East. Should the U.S. leave …
    http://www.fool.com/investing/general/2011/06/03/the-next-huge-oil-spike.aspx

    Next- You can NEVER use FOOLS as a great logical source when it comes to politics… Tried it and lost TONS of money using their “political” insights for trading. ALMOST ALWAYS WRONG. Then I realized they were just BIASED as hell.

    Now…Oil “production” is based on demand. US demand(the largest demand in the world) has gone DOWN during recessions and higher gas prices. Obama also raised US mpg standards MORE in the next 6 years than the last 40 put together. Which is ALSO lowering oil demand.

    When one country is favored by “long-term-contracts” after another drops it’s production, yes it takes awhile to get back to the same production. Refineries don’t LIKE turmoil.

    What’s NOT talked about is the HUGE raise in oil supplies after we get OUT of Iraq and Afghanistan. Stabilizing THOSE countries and getting RID of the CON-ARTISTS, THIEVES, and DRUG WARLORDS installed during the “wars” will have a calming effect.

    Then there’s the billions being input into GREENING the US! That means LESS energy will be used in the future. New homes and vehicles will be MUCH less energy-gulping, as older vehicles are retired, and older homes are upgraded.

    Then there’s that small knat called Solar Panels that keeps bothering the Energy Companies. Billions are being spent by “Oil Countries”! Hello? Billions are being spent by US companies and home-owners.

    The 900lb Gorilla in the room? Imagine what would happen if Congress would take the ZERO-TAX breaks from oil and energy companies and give them to US citizens and small businesses to buy Solar and wind generators? No need to build extra infrastructure, you use the SAME wiring already there! Then watch the prices of oil …INCREASE!

    Sound nuts? Yes it does, but EVERY time the mpg of US vehicles goes up, OIL goes up. Every year the demand of oil in the US goes down, the price of oil goes up! Notice there’s NEVER been any shortage yet the prices SKYROCKETED to $100+? It’s a CON-JOB, just to make as much money as possible for as LONG as possible. Period.

    Besides, they have to pay off those easy-pickens politicians from voting their “old” beliefs and getting RID of that oil welfare funding. (Another writeoff, no wonder they didn’t have to pay taxes!)

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