The Next Huge Oil Spike

Oil prices are now hovering near $100, now that the world seems relatively stable: Egypt and Libya are out of the news, Osama bin Laden is dead, and Iranian President Mahmoud Ahmadinejad will not be chairing the next OPEC meeting. However, sky-high oil prices are not as far off as you may think. Sparks flying among the large Middle Eastern oil-producing nations could send prices soaring for years to come.

Two weeks ago, my colleague David Lee Smith warned Fools to carefully watch the story unfolding in the Middle East. Should the U.S. leave Iraq in December, Iran and Saudi Arabia could begin to vie for power and influence in the region. Iran has been active in trying to influence the region recently, and Saudi Arabia and other countries are getting antsy. Just last week, The Wall Street Journal reported that Saudi officials have been talking with other Muslim nations to join an informal Arab alliance against Iran. Some analysts worry that more nations could be pulled into troubles between the two Middle Eastern powers.

Why this matters
Chaos and unrest have a much larger effect than most people realize. 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.

Let's examine the historical data:

Source: ARC Financial, U.S. Energy Information Administration.

Iran and Iraq in the early '80s provide interesting examples. The Iranian revolution of 1979 followed by the Iraq invasion in 1980 caused Iran's oil production to drop nearly 80%. The invasion cost Iraq dearly as its production dropped 70%. It took Iraq a decade to return to a level near where it was at before the war. In Iran's case, it took 15 years to return to a level 40% below its prior production. It has not been able to produce more than 4.2 MMB/d since.

More recently, Libya has so far lost roughly 75% of its daily production of 1.6 million barrels of oil per day. Using the past as an example, Libya's oil-producing capabilities will not have an effect on the world markets for years to come.

Why this happens
In any war-like situation, you might expect pipelines, wells, and other necessary infrastructure to be destroyed. However, the damage is much broader. The "brain-drain" of experienced workers fleeing the country is a large factor in the loss of production. Skilled workers aren't apt to quickly return, and replacements are hard to come by for a country that has just (in the past five years) gone through chaos.

Beyond that, functioning governments take time to rebuild, and money for new projects is hard to find, as investors demand huge returns for the high perceived risk of the nation. It took nearly seven years for the Iraqi government to auction off some of its oil fields to ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS-B), and BP (NYSE: BP) and that was with the U.S. working feverishly to protect Iraq's oil assets during the war. I doubt you will see Total (NYSE: TOT) or ConocoPhillips (NYSE: COP) returning to Libya anytime soon after losing most of their investment in the country.

The possible future
It is a big "if," in terms of if the big Middle East three fall into chaos, but it's still worth pondering what could happen:

Source: U.S. EIA.

While we can't know the future for sure, it's good to follow the Boy Scout motto of "be prepared." If any of the three were to be affected, particularly Saudi Arabia, oil prices would skyrocket for years. 

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.