The Next Huge Oil Spike
June 3, 2011
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
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.
Why this happensIn 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
Country | Current Production | Low Point? |
|---|---|---|
| Saudi Arabia | 10.5 MMB/d | ? |
| Iran | 4.2MMB/d | ? |
| Iraq | 2.5MMB/d | ? |
Source: U.S. EIA.
Related Tickers
| BP | $44.63 |  | -0.37 | -0.82% |
| BP plc (ADR) | CAPS Rating:  | |||
| COP | $72.39 |  | +0.24 | +0.33% |
| ConocoPhillips | CAPS Rating:  | |||
| RDS-B | $70.34 | | -0.07 | -0.10% |
| Royal Dutch Shell | CAPS Rating: | |||
| TOT | $55.83 | | -0.40 | -0.71% |
| Total SA. (ADR) | CAPS Rating: | |||
| XOM | $81.18 | | -0.15 | -0.18% |
| ExxonMobil Corp | CAPS Rating: | |||
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