Saudi Arabia's Involvement in Iraq Could Prove Devastating

About seven years ago, I wrote a piece for The Motley Fool in which I predicted that, once U.S. troops had left Iraq, the Middle East would be subjected to a new and expanded conflagration. The struggle, I assumed, would likely pit Iran and Iraq together against Saudi Arabia and other countries in the region.

Sadly, that forecast may now be headed for a daunting and dangerous reality. In addition to almost certainly hiking world crude prices over time, it's already having some effect on such big oil and gas companies as ExxonMobil (XOM 0.39%), BP (BP 0.98%), and PetroChina (PTR).    

Source: Wikimedia.

Iran is the leader of the world's Shiite Muslim contingent. While Iraq has a significant number of Sunnis, it, too, is majority Shiite, and this is the direction in which its al-Maliki government clearly tilts. Iran and the southern part of Iraq have been pulled closer together of late by marauding Sunni rebels, who now refer to a swath of Syria and Iraq -- at least the part they control -- as the Islamic State. In recent months, they've brutalized and killed thousands of Shiites, with minimal resistance from the Iraqi military.

Still the center of the world's crude production
Iraq and Iran together produce more than 6.5 million barrels of oil per day between them. That compares with about 11.5 million daily barrels from Iraq's Saudi neighbor. Adding in Kuwait and the United Arab Emirates, both of which would likely be drawn into spreading hostilities in the area, and you've upped the ante by another 6.7 million barrels. That brings the total for these countries to a whopping 80% of OPEC's combined production.

Seven years ago, Iraq's production had declined to about 1.9 million barrels a day, as the country's wells deteriorated during Saddam Hussein's reign of terror. Since that time, however, with assistance from the likes of ExxonMobil, which has been laboring to breathe new life into the big West Qurna field, and BP, which has similarly been renovating the giant Rumaila field, the country's production has been heading higher. PetroChina has become the biggest foreign investor in Iraq by working with BP on Rumaila, and recently acquiring a stake in West Qurna from ExxonMobil.

The fighting hasn't yet reached the southern city of Basra, near where both fields are located. Nevertheless, all three companies last month evacuated non-essential personnel from the country.

As battles continue to rage farther north, with the Iraqi military pitted against the newly proclaimed Islamic State -- whose leader, Abu Bakr al-Baghdadi, has directed threats at the United States in the past -- Iran is sending in munitions, supplies, drones, and some advisors to the Maliki regime. And in what amounts to an odd triumvirate, the U.S. and Russia are also lining up to supply the government with equipment, including aircraft. Putin's people have already sent in SU-25 warplanes. Beyond that, the U.S. military types moving into the country have grown to more than a trickle. Indeed, it seems it could hit 1,000 "advisors" before you read this.

Under-covered tensions with the neighboring kingdom
Where does Saudi Arabia fit into this deteriorating situation? As I noted in my prior piece, only Iraq separates Iran from the kingdom, the center of at least Sunni Islam, and the world's biggest oil producer. Iraq's Maliki has accused the Saudi government -- aka the royal family -- of funding the Islamic State terrorists, a charge that has been roundly denied by the Saudis. Even if the denial is accurate, however, it's possible that backing for the terrorists has come from individual Saudi citizens, or from other countries in the region.

More ominously, while it's been severely underreported in our country, there are credible indications that as many as 30,000 Saudi soldiers have been mustered along their country's 560-mile border with Iraq. Earlier, Iraq denied that about 2,500 of its soldiers had been ordered to leave their posts along that same border.

The Foolish bottom line
Some companies have reduced their worker contingents in Iraq, but others, such as Italy's Eni and France's Total, have left all their workers there. I wouldn't allow concerns about the ravaging of the country to alter my investment decisions at this point. Should the Islamic State lock horns with the Saudis, however, that conclusion could change dramatically.