The Next Huge Oil Spike

Four months ago, I warned Fools to carefully watch relations between Iran and Saudi Arabia as both vie for power as the U.S. leaves Iraq. Yesterday, the world learned of a foiled Iranian government plot to kill the Saudi ambassador to the United States. Escalations such as this have me and many fellow Motley Fool writers convinced a portion of your portfolio should be in oil stocks as sky-high oil prices are not as far off as you may think.

The plot
Alleged members of the Iranian Quds Force, a branch of the Iranian Islamic Revolutionary Guard that "conducts sensitive covert operations abroad," tried to hire an undercover agent posing as a member of a Mexican drug cartel for $1.5 million to assassinate Adel Al-Jubeir, the Saudi Arabian ambassador to the United States. While U.S. officials said it was unclear how many people knew about the plan within Iranian President Mahmoud Ahmadinejad's government, if a plot like this had succeeded and cast the two Middle Eastern rivals into war, it would be disastrous for world oil markets.

Why it matters
People don't realize chaos and unrest have a huge effect on oil production. 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.

The most recent example is Libya. Production had averaged 1.6 million barrels per day but plummeted with the revolution in March:

 

2010

Q1 2011

Q2 2011

August 2011

September 2011

Libyan Production (thousand barrels/day) 1,559 1,096 153 7 96

Source: OPEC Monthly Oil Market Report, October 2011.

Now that Libya is almost completely controlled by the new government, the country believes it can have full production back in 14 months. Wood Mackenzie predicts Libya can have production back in three years. However, both these estimates look optimistic compared to the historical record, which shows an average return time to full production of eight to 10 years.

The worrisome part of this example is the large price increase oil had after the relatively minor loss of production. The loss of 1.5 million barrels per day (total world supply was roughly 82 million barrels per day at the time) added an estimated $10 to $15 premium to Brent crude oil prices.

Saudi Arabia and Iran are much larger producers than Libya, and were they to go to war the effect on prices would likely be an order of magnitude more.

Country

2011 Average Production

Saudi Arabia 9.2 million barrels/day
Iran 3.6 million barrels/day

Source: OPEC Monthly Oil Market Report, October 2011.

While I worry more about what will happen after the U.S. leaves Iraq at the end of the year, the Saudis are worried that Iran may try to cause unrest in the kingdom during the annual hajj pilgrimage to Mecca next month. CNN quoted a senior Saudi advisor who said, "We are on our toes. We expect the worst and we think Iranians are capable of using any person from any country to stir trouble during hajj season."

What you can do
A good way to protect your portfolio from rising oil prices is to invest in oil. Besides an investment in an ETF that tracks oil such as the iPath S&P GSCI Crude Oil TR Index ETN (NYSE: OIL  ) , there are numerous opportunities to invest in. While ExxonMobil (NYSE: XOM  ) is the behemoth in the space, I'm a bigger fan of smaller plays. Stocks I like include SandRidge Energy (NYSE: SD  ) since it's largely undervalued, Kodiak Oil & Gas (NYSE: KOG  ) since I believe it's on acquirers' lists, ATP Oil and Gas (Nasdaq: ATPG  ) since investors punish the stock for its high debt load and ignore its assets, and DryShips (Nasdaq: DRYS  ) since it has finally begun the process of spinning off its deepwater rig business and the Baltic dry index is turning around.

Foolish bottom line
With situations like this in mind, The Motley Fool has created a new special oil report titled "3 Stocks for $100 Oil," which you can download today, absolutely free. In this report, Fool analysts cover three outstanding oil companies, including the stock Fool analyst David Lee Smith calls the "energy king." To get instant access to the names of the three oil stocks, click here -- it's free.

Dan Dzombak can currently be found on his Twitter account: @DanDzombak. He owns shares of ATP Oil & Gas, but he holds no other position in any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (39) | Recommend This Article (118)

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 October 12, 2011, at 5:57 PM, xetn wrote:

    "While I worry more about what will happen after the U.S. leaves Iraq at the end of the year"

    Why? It seems to me everyone would be better off.

  • Report this Comment On October 12, 2011, at 6:34 PM, turnipseedtales wrote:

    One way the Saudis could retaliate is by increasing production, thus driving down the price of oil - and hurting Iranian exports. This assumes the Saudis can increase production.

  • Report this Comment On October 12, 2011, at 6:39 PM, 1960vw wrote:

    I do not see the run up in oil. If it gets too high , no one buys. Where does that leave OPEC? High and dry and little money coming in!!!! Supply and demand in reversal !!!!!! Remember, volumne is profit.

  • Report this Comment On October 12, 2011, at 9:53 PM, tim443 wrote:

    The Saudi's need $95 a barrel (Brent) to keep the promises they made to buy peace in the kingdom.

    Nothing like a little unrest in the area to provide that. As to "no one buys", the Chinese bought a Canadian oil company last week (Daylight Energy) for 110% premium and will build around 17 million cars next year.

  • Report this Comment On October 12, 2011, at 11:22 PM, chopchop0 wrote:

    Are you really pumping DRYS? It's done nothing but drop. Not to mention it was voted one of the scariest stocks in 2007

  • Report this Comment On October 13, 2011, at 12:29 AM, PeakOilBill wrote:

    When I look at that plot, I can only think that it results from some sort of internal power struggle between the mullahs that have controlled Iran since the revolution, and Ahmadinejad's more progressive faction. The Quds Force is too smart to try to hire people who are already very rich, Mexican drug dealers, to blow up things in the USA , which would make their lives a LOT harder if they succeeded. It sounds like a plan by a small group to me. Iran would have far more to lose, than to gain, if they were ever linked to the mass murder of a large # of American civilians. Our removal of Saddam, & the Taliban in Afghanistan, has made them the top dog in the Middle East. Why risk massive US bombing to kill one man? Something doesn't add up. Remember the infamous liar, 'curve ball' who said Saddam had WMDs? This latest guy could be another liar looking for fame or cash from some Iranian faction.

    As to oil, China is now buying more cars than the USA. Nearly all run on oil. Here is a rough quote from one of the smartest people on this planet, Elon Musk (created PayPal, Tesla Motors & SpaceX.com before 40! Visit SpaceX to see what this man has accomplished. It is amazing.). When recently asked why he got interested in the electric car, during a recent speech on the future of human space exploration before the National Press Club, he said that it is obvious that oil is finite, and that as it started to decrease in supply, the price would rapidly rise and cause the economy to collapse. I doubt Tesla will be a success because they will go bankrupt before the peak oil price explosion starts to force people into electric cars. I believe that oil will stay affordable for at least 3 more years.

    The Saudi king has said that the Kingdom will save some oil for themselves, NOT greatly increase oil exports. (Even if they could.) As soon as the peak hits, whether in 4 years or 10, the oil price will go way up. The Chinese figured it out 10 years ago, which is why they are buying every drop of oil supply they can, everywhere they can. They are building roads, dams, schools, airports, you name it, all over the world in exchange for oil contracts. Unlike here, China is run by engineers and people with scientific degrees, not lawyers. They plan long term, not for the next election.

    Sure, if we have another Depression, oil will go down. But the demand from China, India and eventually Africa, will mean it won't stay down for long. The nice thing about oil stocks is that they pay you to wait for the peak. Your money is safe as long as you don't sell during a downturn. The big oils aren't going anywhere because if they did, most of us would starve. How many stocks have the potential for large capital gains, pay you 3 to 5% dividends while you wait, and virtually can't go bankrupt? (BP is still around after they cut corners drilling trying to save a few million, but ended up losing billions. Last quarter, they made around 5 billion.) If you know of any stocks, other than the big oils, that can do that, let me know what they are.

    And if a war does break out over there, they might double in a couple of months. I doubt that a Republican Congress will be too disturbed, no matter how much they charged for a gallon of gasoline. You will pay at the pump, but more than make it up in the market. I hope that a war can be avoided, and doubt that one will occur soon.

    One more thing. Musk thinks he can develop a reusable rocket. That would change the world by making space travel affordable, and colonization of Mars possible.

  • Report this Comment On October 13, 2011, at 9:08 AM, TMFDanDzombak wrote:
  • Report this Comment On October 13, 2011, at 9:12 AM, TMFDanDzombak wrote:

    @jempsall True, though the Saudi's have their own reasons they want to keep the price of oil high.

    The Saudi's need oil prices of $82 a barrel to fund their social programs from revenues.

    http://www.businessweek.com/magazine/the-high-cost-of-keepin...

  • Report this Comment On October 13, 2011, at 9:39 AM, TMFDanDzombak wrote:

    @1960vw The question is whether or not Iran and Saudi Arabia will threaten their domestic oil industry's with war.

    Based on recent actions the Iranian's look like they are willing to risk war.

    See also today's op ed in the WSJ, "Iran's Act of War."

    http://online.wsj.com/article/SB1000142405297020391430457662...

  • Report this Comment On October 13, 2011, at 9:41 AM, TMFDanDzombak wrote:

    @chopchop0 DRYS at 100+ in 2007 is a lot different than DRYS at 2.5 in 2011.

  • Report this Comment On October 13, 2011, at 9:45 AM, TMFDanDzombak wrote:

    @PeakOilBill Thanks for the comments. Question, do you own an electric/hybrid car?

  • Report this Comment On October 13, 2011, at 9:46 AM, TMFDanDzombak wrote:

    @tim443 Thanks for the comment. The estimate in this article is $82 a barrel to support their social programs (while others in the gulf like kuwait need only $77)

    http://www.businessweek.com/magazine/the-high-cost-of-keepin...

  • Report this Comment On October 13, 2011, at 10:33 AM, mdk0611 wrote:

    Wouldn't this scenario also suggest a look at Suncor (SU) with it's concentration in Canada?

  • Report this Comment On October 13, 2011, at 1:54 PM, TMFDanDzombak wrote:

    @mdk0611 Yes, though more so because it is an oil producer and less so because it is in Canada.

  • Report this Comment On October 13, 2011, at 4:53 PM, foolishact wrote:

    This story is as creditable as the WMD in Iraq. I would think twice before I take any action.

  • Report this Comment On October 13, 2011, at 5:55 PM, TMFDanDzombak wrote:

    @foolishact Which part, the saudi ambassador plot or the chance of oil rices spiking?

  • Report this Comment On October 13, 2011, at 5:56 PM, TMFDanDzombak wrote:

    prices*

  • Report this Comment On October 13, 2011, at 9:10 PM, FoolOdds wrote:

    Prior to the US invasion of Iraq, Iran was consumed with a 10 year + war with Iraq. With Saddam out of the way, Iran is now free to devote its resources to creating havoc elsewhere in the world.

    Just another reason why we shouldn't have gone into Iraq in the first place.

  • Report this Comment On October 13, 2011, at 11:02 PM, Shawnerz wrote:

    I'm a fundamental investor. Looking over the numbers, I don't see how SD is going to take off soon. So much debt, high PE, EBITA isn't stellar. But, I seem to be in the minority. Over on CAPS, everybody loves it. I think it's wishful thinking and hope, more than anything.

    Having said that, sometimes the dark horse wins. I went ahead and bought 50. At ~6.50 a share, you can see that if goes to 0, I haven't lost muich skin.

    Over th next 3 years, i don't see this stock doing much.

  • Report this Comment On October 14, 2011, at 11:28 AM, natrllifter56 wrote:

    All you have to do is go to Youtube and search for Lindsay Williams. He explains it all. It is all a plan to shut us out by the Oil barons so that oil will become more scarce. Therefore it will give them a reason to raise our gas prices and they make astronomical profit. It will also implode the dollar as the OPEC nations deal is to pay a percentage of the their profits to our national debt. That money goes away we are sunk. UCC.

  • Report this Comment On October 14, 2011, at 12:16 PM, michjksn wrote:

    foolishact has it right; you're an alarmist trying to pump. Kodiak? Really?

  • Report this Comment On October 14, 2011, at 12:20 PM, sleepyshark wrote:

    PQ is my current energy stock of choice, and writing calls on it has proven quite beneficial for me. One thing, though: Aren't you tired of hearing from the "energy experts" and "well-meaning politicians (subjects of oil industry lobbyists...) that this week we are going to run out of oil next year...then, in a successive week later, another researcher says, "...we got oil for 100 years!..." (sic)? Tying everything into the equation, from growing oil demand by developing nations, findings of numerous alternative energy resources (wind, solar, natural gas, geothermal, ocean wave based generators, nuclear plants, breeder reactors, biofuels, plant fuels, incarcerated politicians and oil industry execs made to operate squirrel-cage-attached generators...), not to mention the effects brought about by utilizing electric and hybrid car technologies, should we or any oil-producing nation should go to war over a barrel of oil? Just a thought.

  • Report this Comment On October 14, 2011, at 12:26 PM, petengr wrote:

    Your oil investment recommendations are okey, but I think you should include Canadian oil and gas stocks. They pay high dividends.

  • Report this Comment On October 14, 2011, at 1:10 PM, jtmccjr wrote:

    Wow, more conspiracy theories in these comments than you can shake a stick at.

    The global economy runs on oil. China, India, Brazil and lots of other nations are growing and an incredible rate and need more oil to fuel their growth. New supplies and, more importantly, new refining capacity is not keeping pace.

    Price of oil will probably rise. How much and when is just guessing as there are too many variables, known and unknown to make an accurate prediction. But oil prices will rise............

  • Report this Comment On October 14, 2011, at 1:42 PM, mike2153 wrote:

    Can somebody please explain to me what the thinking behind a plot to kill that ambassador might be? What does that do for them accept possibly provoke a war?

  • Report this Comment On October 14, 2011, at 2:16 PM, stockingshorts wrote:

    mike2153-

    It has been reported that the Saudi Ambassador made some remarks about "cutting the head off the snake" in regard to Iran to one of our high ranking officials in the State Department.

    Wiki Leaks is how Iran found out about the remark.

  • Report this Comment On October 14, 2011, at 2:57 PM, PeakOilBill wrote:

    @mike2153

    The religious mullahs that control Iran thought that Ahmadinejad would be their obedient little lap dog when they allowed him to run for president. However, once he got in office he started to try to modernize the political system somewhat and liberalize the country a little. Now they hate him since he is very reluctant to follow their orders, and do as they say without question. Ahmadinejad even went on strike for a week, doing nothing. In short, there is a power struggle going on inside Iran. Some group, possibly a small group, may want Iran to be attacked to unify the population against an aggressor. The religious leaders might want to use an attack to get rid of Ahmadinejad.

    Iran is ruled by Shia Muslims, but has a rather large Sunni Muslim minority. They two generally don't get along. In the North, the Kurds are another large minority group.They too have their own language and culture separate from the Shia rulers. I doubt they were involved in the bombing plot since the USA liberated Kurds from Saddam in Northern Iraq. Some group might be hoping for a US invasion. That WILL NOT happen. Iran is a mountainous death trap for an invading army, with a large population.

    The Quds Force that is supposed to be involved in the plot is generally considered a dangerously capable bunch of elite soldiers. The Israelis discovered that during their last war in Lebanon. So something about this whole thing is fishy. I'm not bright enough to figure it out. Sometimes truth is stranger than fiction, like 9/11.

    @TMFDanDzombak

    No. I drive a silver 2000 Ford Expedition that I bought used from my brother-in -law for $7,500 that still looks new. I'm retired in a small town and drive VERY little. But I would pay $200,000 for an electric car rather than walk or ride a bike in this humid tropical heat with 62 inches of yearly rain. I was standing on top of the Plaza Tower skyscraper in 1975, looking at all the freeways and ships on the Mississippi River in New Orleans, when it suddenly hit me what would happen when the oil that was running everything that I was looking at moving around, started to run out. At the time, I was relieved that I would be dead before it happened because of the drastic reduction in living standard that it will probably cause. I may have been wrong.

  • Report this Comment On October 14, 2011, at 5:56 PM, rru2s wrote:

    If you want a nice safe dividend play, canadian company PBKEF has an 11% dividend at current prices and has upgraded their fracking technology considerably. Potential double within 6 months.

    If you want a higher risk but higher return play, Longwei Petroleum (LPH) is an oil wholesaler in China with 2 distribution facilities and 75% downpayment on an acquisition of a third facility to occur sometime this quarter, which will increase EPS from $0.65 to over $1.00. P/E is only 1.5. LPH beat their earnings estimate in the 10K issued mid-September. They had $85M down on the new facility as of June 30th end of quarter, and usually net income after taxes is around $18-$19M per Q, so by end of October they will have the money to close. CEO of Rochdale investments used to work for KPMG auditors and Rochdale owns between 1M and 2M shares in LPH. Longwei has been in oil wholesale business with owner Cai Yongjun since 1995 and sell gas to retail gas stations and diesel to the military and to coal and steel factories in Shanxi province. LPH has added respect with investors because they rescinded an S3 filing withdrawing a $50M shelf offering to help pay for the new facility and are doing it all with earned cash in order to protect shareholder value. Potential triple within 9 months.

  • Report this Comment On October 14, 2011, at 7:17 PM, mike2153 wrote:

    @ PeakOilBill

    Thanks for yours and the other guys replies. To you're second point, I live in Houston, TX and own shares in ATPG, and I follow the oil and gas business closely. Unless you live an extremely long life, I don't believe petroleum resources will be in short supply for many years to come. Between on/off shore drilling, shale fracking, oil sands, and continuous new discoveries, oil will rule for a long time to come. That's why non-petroleum powered auto and power industries are taking such a long time gain a significant foothold.

  • Report this Comment On October 14, 2011, at 7:20 PM, whyaduck1128 wrote:

    "People don't realize chaos and unrest have a huge effect on oil production."

    Wow, what a revelation! If you hadn't told us that, we would never have known.

    In the words of Gunnery Sgt. Hartmann, "Well, no sh**!"

  • Report this Comment On October 14, 2011, at 9:52 PM, ershler wrote:

    sleepyshark,

    If Iran and Saudi Arabia go to war there will be other issues like vying for regional power and the shia/sunni conflict.

    PeakOilBill,

    It seems to me you are describing the population distribution of Iraq, not Iran.

  • Report this Comment On October 14, 2011, at 10:06 PM, ershler wrote:

    xetn,

    Are the 30 million people who live in Iraq included with everybody?

  • Report this Comment On October 14, 2011, at 11:50 PM, AviatorRuss wrote:

    tmfDanDzombak said:

    "The worrisome part of this example is the large price increase oil had after the relatively minor loss of production. The loss of 1.5 million barrels per day (total world supply was roughly 82 million barrels per day at the time) added an estimated $10 to $15 premium to Brent crude oil prices.

    Saudi Arabia and Iran are much larger producers than Libya, and were they to go to war the effect on prices would likely be an order of magnitude more."

    Unfortunately, you are leaving out an important piece of the puzzle with the "order of magnitude more" statement. I believe you are basing this on production volume alone. You should consider that Libyan Crude is very light/sweet compared to Saudi and Iran's more typical Heavy and Sour (they do have L/S...it's still not as good as Libya). Light Sweet carries a higher premium because it requires less refinement and is used for higher grades of fuel. Thus, the $10-$15 rise in Brent was more a factor of losing this very high quality low volume crude supply, and not simply losing "only" 1.5mbbl volume of the 82mbbl daily supply. It's not a 1 for 1 comparison. I do agree that the price would go up nonetheless, but "orders of magnitude" should be defined better.

    -AviatorRuss

  • Report this Comment On October 15, 2011, at 3:00 AM, traderbach wrote:

    OK.

    Many disagree w/ your choice of oil stocks. They look OK to me but please do not write as if this fantastic confection of a tale is fact. These are allegations, nothing more. As somebody above wrote, this story is in the same class as the WMD story that cost the world so many lives & brought America a good way down. After that & so many other fairy stories that have damaged US credibility & the economy by getting us mired in foreign wars I am amazed at your unquestioning belief.

  • Report this Comment On October 16, 2011, at 12:18 PM, PeakOilBill wrote:

    @ershler

    Both Iraq and Iran have minority populations of Kurds and Sunni Arabs. In Iran, the Kurds are in the Northwest. Kurds are the largest ethnic group that have never had their own country. They are in Turkey, Syria, Iraq and Iran. Although Persians control Iran, millions of Arabs live there.

    Some old National Geographic maps have a region on them labeled 'Kurdistan' that includes parts of Turkey, Syria, Iraq, and Iran. Such maps are no longer considered 'politically correct.' Wikipedia has a map of a proposed 'Kurdistan'.

  • Report this Comment On October 16, 2011, at 1:39 PM, chris87654 wrote:

    The first article I saw about this said the Saudis CAN increase production and retaliate, especially since their supply is a similar grade. Of course, the same was said when Libya shut down (then disappeared), but oil went up anyway. I guess the slant depends on whether or not the article is written by a straightforward individual who deals with facts, or a "speculator friendly" source. Speculators should diversify - oil price (a lagging indicator based on increased demand AFTER economies actually pick up) is now tied to the stock market (a leading incator) and it's creating gridlock because when jobs come back demand WILL increase and the cost of gasoline will stifle circulation of money to other sectors.

  • Report this Comment On October 16, 2011, at 1:42 PM, chris87654 wrote:

    Iran and Saudi Arabia will not go to war. Iran may go to war with someone, but it won't be the Saudis (more likely with Israel over nuclear weapons). But talking about it is another good "sky is falling" excuse to bid up oil prices.

  • Report this Comment On October 17, 2011, at 2:13 AM, ershler wrote:

    PeakOilBill,

    I won't disagree with you that Iran has populations of Sunnis and Kurds, but the Sunni minority is much larger in Iraq than Iran and the Kurds are located in the north like you said in your original post.

  • Report this Comment On October 18, 2011, at 12:27 AM, PeakOilBill wrote:

    IF the US troops leave Iraq, as now seems likely, anything can happen. I don't see the Iranians invading Iraq, that would see the US respond immediately, but I do see a low-level Sunni-Shia struggle starting. Will it lead to an eventual hot war between Sunni and Shia Islam with Saudi Arabia backing the Sunnis and Iran backing the Shiites? Who knows, but it certainly has the potential to, which would send the oil price to the Moon.The Iranians could send a stealth army of agents into Southern Iraq, but that will be difficult because the Shia population in Iraq bordering Iran is composed of Arabs, not Iranian Persians. That said, over time, I wouldn't be surprised to see Southern Iraq falling under Iranian influence, with them eventually virtually running the place. It will be called Iraq, but culturally and economically it will probably be more like Iran.

    Most likely will be a de facto division of Iraq along religious and ethnic lines. Hopefully, such a division will limit the conflict to occasional bombings and assassinations, rather than all out war. Oil can probably get out by tanker and pipelines through neighboring countries.

    The good thing is that it is in no one's interest to have a major conventional war because they all need the revenue from oil sales to feed their populations, and the world needs the oil from the region. Billions would starve without that.

Add your comment.

DocumentId: 1568432, ~/Articles/ArticleHandler.aspx, 7/29/2014 1:35:20 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement