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In part one of this article, we looked briefly at the Obama Administration's new proposal to figuratively fence off 1.6-million acres of land from oil shale development. We then proceeded to discuss some of the most significant natural gas issues that our nation is likely to encounter between now and the end of the second Obama term in 2016.
As we learned, there are few "givens" with respect to natural gas. Indeed, at the beginning of the president's first term, the clean-burning fuel was trading at about $12 per million BTUs, a level about three times higher than those prevailing today. Fortunately, we can only conjecture about the state of our economy today had prior prices prevailed.
Unlike gas, crude oil is fungible, meaning that a unit in one part of the world can, at least theoretically, be replaced by a unit in another. As a result, however, crude prices thereby become more sensitive to geopolitical uncertainties and economic ripples than are gas levies. And while crude prices have been unusually steady during the past year, let's take a quick gander at some significant oil-related circumstances at home and abroad:
World supplies and prices
For the most part there is little current concern about crude supplies becoming inadequate either in the U.S. or internationally. But I would remind you that we're attempting a perhaps impossible task -- looking out at oil availability and resulting prices over a four-year period. In reality, any sort of unexpected economic or geopolitical activity, almost anywhere in the world, could drive prices rapidly in one direction or the other.
For now, while we may not be awash in oil, we're not far from it. With many of the world's economies still in the doldrums, it's expected that worldwide production will exceed demand by about 630,000 barrels a day during this quarter, the biggest positive gap in four years. After all, the Saudis appear to be producing at high levels, and the U.S., the North Sea, and Africa are relatively close behind. In part for that reason, analysts at Goldman Sachs recently trimmed their 2013 price forecast to $110 per barrel, from $130.
The situation at home
In the U.S., hydraulic fracturing, involving the same technologies that ramped up our natural gas reserves, has had a similar effect on crude production on land. As you likely know, production plays like the Eagle Ford in Texas and the Bakken in North Dakota are producing far more oil and petroleum liquids than was even remotely thought possible until recently. Beyond that, the Permian Basin of Texas and New Mexico, a play that has been producing for decades, has been given a new lease on life by advancing technology.
The Gulf of Mexico, where activity slowed dramatically following the 2010 explosion aboard Transocean's (NYSE: RIG ) Deepwater Horizon rig -- which was completing a well for BP (NYSE: BP ) -- has at least returned to normal, both on the shelf and in the deepwater.
One of the relatively immediate questions relating to our crude oil scene involves whether or not TransCanada's (NYSE: TRP ) proposed 1,661 Keystone XL pipeline that would connect Alberta's oil sands to refineries on the U.S. Gulf Coast will become reality. As you know, the permitting of the line was turned down by the Obama administration for environmental reasons a year ago, a decision that was affirmed in January. I tend to side with those who believe that an approval of Keystone's construction will be forthcoming from our newly reelected president. Nevertheless, I'm still hesitant to bet my firstborn son on that likelihood.
There are some producing areas in the world where events are going swimmingly at present -- the aforementioned North Sea, Sub-Saharan Africa, and, yes, the U.S.. Conversely, ExxonMobil (NYSE: XOM ) appears to be attempting to sell its stake in the West Qurna-1 field in southern Iraq, which it has been revitalizing in a partnership with Royal Dutch Shell (NYSE: RDS-B ) . The potential effects on the war-torn country and its reemerging energy industry -- other companies may follow suit -- are unlikely to be positive.
Beyond that, Russia, where Exxon also is headed to work with the state-controlled Rosneft, is hardly tranquil with the resumption of a Putin presidency, and Brazil has lost much of the allure that it held just a couple of years ago. Venezuela remains Venezuela, with a newly reelected, but apparently ill, Hugo Chavez at the helm. While these countries currently don't rise to the level of immediate geopolitical concerns, I'm nevertheless inclined to monitor their circumstances closely.
The Middle East, etc.
Less than three weeks ago, The Wall Street Journal included as a factor for increased global crude production the notion that "turmoil in the Middle East has subsided." I beg to differ. During the weekend, 9,000 Syrian refugees crossed the border into Turkey -- an ample demonstration that the Syrian bloody conflict is hardly winding down. Last week it was disclosed that a pair of Iran's jets had fired upon an unmanned U.S. drone in -- our government maintains -- international airspace. And as recently as Monday it was reported that Iran now has launched its "biggest ever" air drills.
If all that weren't enough, also over the weekend Israel fired warning shots at Syria after fighting between the latter country's forces and rebels spilled over into Israel's Golan Heights. I could continue, describing intensifying difficulties in North Africa's Mali, but I suspect you get the picture: The Middle East and North Africa have attained tinderbox status as almost never before. The slightest spark could cause the region to erupt, quickly sending crude prices skyward. Beyond that, given our four-year time frame, I'm willing to wager that, absent intervening explosions, the situation there is no less likely to qualify as tranquil in 2016.
The Foolish takeaway
As I noted at the conclusion of the first part of this article, I believe that all circumstances with the potential to affect oil and gas pricing and production, foreign and domestic, should we watched carefully. You can do much of that on your own. But I'd also suggest adding giant ExxonMobil to My Watchlist. It's a terrific proxy for the worldwide energy industry.