Getting Crude in All the Wrong Places

It seems to me that crude oil prices blew past an important barrier last week when they topped $80 a barrel. Now, I realize that that level is still below the previous inflation-adjusted high. But while those prices may pull back temporarily, perhaps to the mid- or even low-$70s, long-term structural, geologic, geopolitical, and economic forces will conspire to boost them to steadily loftier levels for years to come.

Where's the crude?
In this connection, let's look quickly at a daunting -- and I think grossly underappreciated -- potential future driver of crude prices. It's a key reason for my strong belief about the energy companies as investments. Most everyone knows about the demand growth in the developing nations, and many of you know about the major difficulties posed by output declines in many of the world's older (and bigger) fields.

But I don't think enough of us pay sufficient attention to where oil and natural gas have been deposited, or to the fact that an alarming number of the nations where hydrocarbon deposits exist may not be included on a list of friends of the U.S. In fact, I don't think it requires much of an imagination to envision how, especially as crude demand begins to outstrip supply, confrontations among nations could threaten the rather substantial amount of crude oil we're forced to import each and every day.

Three keys
For now, I'd like you to consider just three facts about estimated global energy reserves as we know them today. First, about 55% of the world's known crude oil reserves are located in such Middle Eastern countries as Saudi Arabia, Iran, Iraq, Kuwait, and the United Arab Emirates. Second, along with the Middle East and Canada -- with its oil sands -- the world's biggest crude deposits are found in Venezuela, Russia, Libya, Nigeria, and Kazakhstan, in that order.

And third, the U.S. probably has slightly in excess of 200 trillion cubic feet of natural gas reserves, ranking us fifth in the world. But that's little more than a fifth of Iran's stash and less than an eighth the amount in Russia.

A quick tour
OK, with those three morsels firmly in mind, let's quickly look at some things we definitely should know about several of the places where the world's biggest energy reserves are located. Some will be familiar to you; others will probably be new. Together, they seem to add up to a feast of food for thought about the long-term security of energy supplies for the West:

  • You already know about Venezuela and Nigeria, two members of the OPEC 13. You know of Venezuela's Hugo Chavez and his nationalization effort, and Nigeria continues to be hit by tribal battling that has spilled over into kidnappings and the deaths of Western oilfield workers.
  • You also realize that Russia has recently forced Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) and BP (NYSE: BP  ) to surrender operating positions in two huge Russian energy projects. I'm also forced to wonder about the leverage over much of the world that Russia could enjoy from Gazprom's role as a major international natural gas supplier.
  • Iran's President Mahmoud Ahmadinejad has already warned that his country would fill any power vacuum that develops in Iraq. With elements within the U.S. congress pushing for a rapid withdrawal of American troops from Iraq -- and this is not a political comment -- I view that unstable nation's location right in the middle of Iran, Saudi Arabia, and Kuwait as highly problematic.
  • There are powerful rumors that about two weeks ago, Israel quietly conducted air strikes against Syria, which sits atop Iraq. The target: nuclear weaponry acquired from North Korea and likely brokered by Iran.
  • Speaking of Saudi Arabia, the kingdom is our friend for now. But I would also remind you that it also is the home of Wahhabism, a radical Muslim sect. I'd also venture that the royal family could, at some point, be vulnerable to a restless or terrorist citizenry.
  • Kazakhstan is the site of the big Kashagan oil field, the world's biggest discovery since Prudhoe Bay. Having apparently learned well from their Russian neighbors, Kazakh officials are currently pressuring a phalanx of Western oil companies, led by Italy's Eni, for a sweeter deal for the government in developing the field.

So if you match up the nations mentioned in the three items, you learned about global hydrocarbon reserves with the countries discussed in the bullet points above. You may have found the similarities more than interesting, and you may just conclude that our energy situation appears to be far more precarious than you'd previously thought.

As a result, I've repeatedly urged my Foolish friends to make certain that their portfolios contain a reasonable blend of energy names. I don't think you need to get too fancy here, perhaps beginning with the two big enchiladas in the production and oilfield service sectors, ExxonMobil (NYSE: XOM  ) and Schlumberger (NYSE: SLB  ) . Beyond that, it might make sense to fill in with other solid names in the sector, such as natural gas growth story and Motley Fool Inside Value recommendation Chesapeake (NYSE: CHK  ) or deepwater drilling king Transocean (NYSE: RIG  ) .

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