The World of Energy Just Might Explode

You probably gripped your stomach -- and your wallet -- last year when crude prices ran to nearly $150 in July, then turned and plummeted into the $30s before 2008 ended.

There were lots of reasons offered for this wild ride, with simple supply and demand and speculators' antics leading the pack. But a wild ride it was, so wild that most of us haven't noticed that crude has essentially doubled from the low. So why, with oil demand still falling among the developed nations, have prices moved higher?

Again, there are lots of reasons, including concerns that the rapid price decline has knocked out scores of oil and gas projects, such that when the economy recovers and demand returns, our supplies will be insufficient. That's a valid concern, but there's another hypothesis that's receiving almost no attention -- one that could push crude lots higher.

If you think about it, several of the producing nations are virtual tinderboxes, and it wouldn't take much to ignite a geopolitical explosion that would send crude prices to goodness knows where. Indeed, just the past two weeks have seen a bevy of threats and outright violence, much of which has generally been ignored.

Nigeria's not on the MEND
Take Nigeria, for instance. Most of the nation's oil comes from the Niger Delta, where local tribes have felt left out of the spoils of energy. They therefore, under the title of the Movement for the Emancipation of the Niger Delta, (MEND), have launched a series of attacks against Western oil companies and their employees in recent years.

In January, for instance, an armed group attacked an ExxonMobil (NYSE: XOM  ) platform, which was operating a couple of hours off the Nigerian coast. And then last week, MEND warned companies working in Nigeria -- which would include Royal Dutch Shell (NYSE: RDS-A  ) and Chevron (NYSE: CVX  ) , among a host of others -- to evacuate their personnel.

Then, true to its word, MEND launched a series of attacks against Nigerian military patrols, patrol boats, petroleum infrastructure, and employees working on them. While the details of the attacks and their aftermath remain foggy, it appears that skirmishes continued into the weekend. A string of similar events have chopped Nigeria's crude production by nearly 25% since 2006.

Hugo's at it again.
And then there's our friend Hugo Chavez, who's again misbehaving in Venezuela. Just 10 days ago, Chavez helped himself to the assets of Williams Co. (NYSE: WMB  ) , a Tulsa-based company that, among other things, operates high pressure gas injection plants. Those antics followed an event earlier in the year when Venezuelans forcibly took over operation of an Ensco (NYSE: ESV  ) rig, after the company refused to continue its operations due to non-payment.

Shortly after crude prices began to fall late last summer, and following his decision three years ago to nationalize energy -- and numerous other industries -- Chavez stopped paying most service firms, although word has it that the biggest members of the sector, Schlumberger (NYSE: SLB  ) and Halliburton (NYSE: HAL  ) , for instance, have been relatively unaffected. Nevertheless, at the end of last year, Petroleos de Venezuela (PdVSA), the government's oil company, owed its suppliers nearly $14 billion.

The new law, passed less than two weeks ago, will permit PdVSA to use government debt instruments to pay the firms. Regardless of the form of the payments, however, as in Nigeria, the chaos in Venezuela has led to a significant production cut in the nation.

And potentially the big one ...
Finally, there remains the possibility of Iranian energy disruptions that could be far more devastating than anything emanating from Nigeria or Venezuela. Some think there is a growing possibility of an Israeli attack on Iran. Indeed, former Vice President Cheney was interviewed last week on CNBC, where he made this prediction: "The Israelis look at developments in Iran, and they have stated publicly that they believe a nuclear-armed Iran is something that fundamentally threatens their existence. So, I would expect them to try to do something about it."

All this occurs following an announcement last summer by Iran that it has developed a naval weapon capable of destroying any vessel within a 300-kilometer radius. As such, the nation claims it could close the Strait of Hormuz -- through which 40% of all seaborne oil passes -- "easily and on an unlimited basis." Such an event would clearly blast crude prices through the stratosphere.

So while crude seems to be settling around $60 a barrel, I'm convinced that the specter of world events will likely push it at least somewhat higher. On that basis alone, I'd urge my Foolish friends to include energy representation in their portfolios. My own favorite continues to be the biggest of them all, ExxonMobil.

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned above. He does welcome your questions or comments. The Motley Fool has a well-fortified disclosure policy.


Read/Post Comments (4) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 21, 2009, at 2:20 PM, deltafox2 wrote:

    "Peak Oil was in 2008" - most probably a valid comment. Some day in the not too distant future this year, the vast quantitis of crude stockpiled in tankers around the world to keep prices up will be gone and it's highly unlikely the price will go down again; certainly not to $30 levels.

    The rate of the "explosion" will depend on a lot of factors, i.e. duration of the global "downturn", amount of money going into crude as a speculative hedge, etc. The likelihood of growing international unstablity clearly is higher than the reverse, so I tend to share David's view on this. You can't lose on crude in the long term, the world is too dependent on this source of energy.

  • Report this Comment On May 21, 2009, at 11:14 PM, booyahh wrote:

    Gasoline smells really good. Alternative energy is like margarine. No matter how much anyone say margarine is better for you, there will always be strong demand for butter, oil, and casual sex. That is the reason oil is going back up, and will go back up higher.

  • Report this Comment On May 22, 2009, at 2:16 AM, devilinside wrote:

    I also agree with the assessment for energy stocks. Anyone that thinks oil prices will not rise in the future is not living on planet earth. I see oil at $70 to $75 range by Aug. or sooner. And that's without all the geopolitical nonsense in the world.

  • Report this Comment On May 22, 2009, at 8:02 AM, brwn8484 wrote:

    Every time Oil prices rise it makes me think of the Enron boys and the fact that we still have not held anyone accountable for the latest financial meltdown.

    You can give whatever excuse you like for high oil prices, but the fact remains that the US has buried its head in the sand for years as environmental wacko's have dictated our energy policy.

    We could have built Nuclear plants but that was nixed. We could be drilling in thousands of high oil production areas but those ideas have been nixed. We could have developed many alternative energy sources but that was effectively ignored due to poor leadership and a lack of comprehensive energy policy.

    IMHO we deserve every price gouging we get with Oil... If it wasnt my wallet being affected, I would sit back and laugh at all the brainless dolts complaining about energy prices even while we allow our socialist, environmentalist and naive leaders continue to drive our country down the energy and economic toilet bowl.

    One day we Americans will wake up and realize that the rest of the world has passed us by ... both economically and energy wise.....

    Welcome to the new world order boys... Hang onto your wallet(s) as the days of free enterprise and fair and honest trade are over!

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