Your Best Defense Against a Rising Oil Price

I’m sure you’ve followed recent news from the Middle East. Iraq is breaking into three regions defined by ethnicity and religion — Sunni, Shia and Kurd. It’s along lines that I’ve described over many years, in the “Oil Wars” scenario.

Oil prices are moving upwards across the world. Still, close to home, we have fracking in North America… and not a moment too soon. As with “Oil Wars,” I’ve followed the fracking and technology phenomenon in the pages of my newletter, Outstanding Investments, as well. Looking back six years or so, that three million “extra” barrels of oil per day in the U.S. — all from fracking — is equivalent to what Iraq produces on its best day.

Don’t get comfortable, though. Everything is related to everything else. We may have slightly more domestic “energy security” in the U.S. and Canada than a few years ago; but we’ll experience global price shocks as things unfold. I’ll go into more details, below.

To begin, however, consider what this all means to you, and to your investments and investing strategy. Where do you go from here? Let’s think it through — as we approach the longest day of the year, here in the Northern Hemisphere.

I’ve written many articles about how ethnic and religious issues in the Middle East and North Africa (MENA) are leading to regional breakdown — that “Oil Wars” scenario.

If you’ve read my work before, I’d like to think that you’re far ahead of the crowd when it comes to understanding the big picture of MENA. Heck, you’re likely far ahead of many politicians who pretend to make “policy” that affects things in MENA.

Right now, across the entire MENA region, Islamist propaganda is focused hard on erasing national boundaries set by colonial powers in 1916. Indeed, that idea is becoming more and more popular among Arabs. Thus the post-war arrangement for the Middle East — post-World Wars I and II — is falling apart. When a century of history goes off the rails, we’ll witness tumult.

In general, what’s happening is not good for U.S. interests, nor Western interests in general. Where are things heading? Frankly, it’ll likely get much worse. I expect a regional war to occur in that part of the world; from the Nile River in the west, to the Indus in the East. It’ll get ugly; no, make that very ugly.

Closer to home, terrible things will doubtless blow back. Many of those crazed Islamist fighters that you see in news photos and television video hold passports from the European Union, and even the U.S. and Canada. Prepare for when they come home. It’ll get very, very ugly.

Of course, when it comes to tangible things like oil, oil prices and energy investing, the Iraq situation is bad, if you prize stability. I’ll discuss this below.

Lest I be accused of total negativity, however, let’s look at the Iraqi oil sector, which has done well over the past decade. Despite having many oilfields, pipelines and assets located in the heart of a vicious war zone, Iraqi oil output has climbed steadily, as this chart shows…

Iraq Oil Output Since 2005Iraq oil output (thousands of barrels per day), since 2005.

As recently as February 2014, Iraq oil output hit a 35-year high of over 3.5 million barrels per day. “It looks optimistic for them (the Iraqis),” said one well-known European energy analyst, in a March interview with Bloomberg News. (I’ll refrain from publicizing the man’s name, to spare him further embarrassment.)

Iraq “should be on track for a good (spring),” continued this particular oil sage. “There’s great (oil) export capacity available and that will help boost confidence among customers that they’ll get their crude when they want it.”

Then again… whoops. Just when things were starting to roll along, the proverbial wheels fell off the Iraqi bus, and fast. About 10,000 mostly foreign jihadi fighters — equivalent to an infantry division, technically — conquered western Iraq, essentially erasing the border between Iraq and Syria.

Who are these guys? They seem to be a collection of fighters from all across the Middle East, as well as from Europe, Africa and even Asia and the Americas. They have money, training, organization, light weapons, Toyota pickup trucks and a flair for YouTube videos. Somebody is paying this tab; in other words, it’s not a bunch of disaffected guerillas, living in caves up in the mountains.

By all accounts, foreign fighters cut through the half-million man Iraqi army and police force like a hot knife slicing butter. Crazed jihadis they might be; but give the Islamist troopers credit for combat effectiveness. Then again, they apparently executed many thousands of prisoners — unadulterated war crimes — and bragged about it. It’s something of a first in the modern tale of military operations. I suspect that there’s much more back-story to this story; we just don’t know the details yet.

We do know that, right now, things are bad in Iraq. In a practical sense, here’s a NASA LandSat image of the country’s largest oil refinery, at Baiji, just northwest of Baghdad.

NASA LandSat Image of Iraq's largest oil refinery

What’s wrong with this picture? If you say that refineries aren’t normally supposed to be on fire and billowing smoke, then you’re on the right track.

Normally — when it’s not exploding and burning — Baiji refines 300,000 barrels per day of product. Of course, it’s “over there” in Iraq, and its output is almost entirely slated for internal Iraq consumption. So what does it matter to you?

Well, if Baiji goes down, expect Iraq demand to tap international markets for gasoline, diesel, jet fuel, lubricants, etc. Thus does a burning refinery in Iraq reach out and touch global pricing levels. Everything is connected to everything else.

Also, as an aside, I’m prompted to wonder… Is this what $2 trillion of money-blowing American nation-building looks like? Is this what you get for 4,500 dead U.S. soldiers, and another 500 deceased allies? And 50,000 wounded? This is the return on investment for 250,000 dead Iraqis? Ugh. As I noted above, what a mess we see in Iraq.

Meanwhile, as we consider Iraq, let’s look at oil prices. The world-class Brent crude quote is up strongly, of late, as the six-week chart shows. No surprise here, right?

Crude Oil Price, May 1, 2014-June 12, 2014

Then again, the current Brent price isn’t all that bad, if you look at things in the longer perspective of five years.

Crude Oil Price, Jan. 2009-June 2013

Yes, global oil prices are up with bad news from Iraq; but the price rise isn’t a number that we haven’t seen several times before, within the past three years or so. Somehow, the world has survived. So let’s be cautious, here. Don’t panic into rash investment behavior based on shocking news headlines.

Best wishes…

Byron W. King
for The Daily Reckoning

Ed. Note: As Iraq continues to self-destruct, watch the price of oil closely. And sign up for the FREE Daily Resource Hunter email edition for regular chances to discover real profit opportunities in the resource and energy space.

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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