$200 oil in 2012?


In May 2008, as crude oil steamed toward a July — and all-time — high of $147 per barrel, a Goldman Sachs  group predicted that black gold’s price could move as high as $200 within the following 24 months.

Instead, during the second half of the year its price rolled over and began a free fall to near $30 as December brought the eventful year to a close.

It now appears, however, that Goldman might just have been early in its prognostication, rather than simply wrong.

Oh, I know, light, sweet crude is currently trading near $100 a barrel, and it would require a host of major events to drive it to double that level, especially during 2012.

But almost unnoticed is a price increase by nearly a third in just the past month. I’m wagering that a host of the potentially catastrophic events could involve Iraq and its neighbour to the east, Iran. The result, almost certainly, would be a steep escalation of crude levies.

Swimming in oil?
For now, energy affairs in war-torn Iraq are progressing swimmingly. The country’s production has grown by leaps and bounds since major oil companies from around the world – beginning with a BP-led (NYSE: BP) consortium, and later including ExxonMobil (NYSE: XOM) and Royal Dutch Shell (NYSE: RDS-B) – began accepting the government’s unusual contractual terms and started reinvigorating its major (albeit waning) fields.

The companies have boosted Iraqi production from a couple of thousand barrels a day to 2.6 million daily barrels in just over a year.

Even more impressive are the seemingly reasonable notions that the country could reach 9 million barrels a day within a few years. That number assumes, however, that the companies are able to plug away unabated. And therein lies the rub.

Questionable pullout and the lurking dangers
Last month, US President Barack Obama announced a complete pullout of all U.S. forces from Iraq, thereby making room for as many Iranians as that country’s President Ahmadinejad wishes to deploy to his neighbour’s territory. The Wall Street Journal called the announcement “a disappointment for U.S. defence officials.”

Further, ExxonMobil has ruffled feathers in Iraq by becoming the first member of Big Oil to reach an agreement to search for oil and gas in the country’s semi-autonomous Kurdistan region. The Kurdish area is thought to hold as much as 45 billion barrels of oil and 200,000 billion cubic feet of gas, amounts approximately comparable to those in Libya.

Obviously, the primary concern involves the potential for widespread conflicts between the companies working in Iraq and those that wish to spread their efforts to the Kurdistan region. According to the Iraq Oil Ministry’s Abdul Mahdi al-Ameedi, “Exxon should choose between either continuing with its deal with the Kurdistan Regional Government or lose its contract in southern Iraq.”

More potential strife in the region
Clearly more danger lies in Iran’s development of nuclear weaponry, which – if it weren’t already widely known – was documented this month in a United Nations report. Beyond that, concerns are mounting almost daily regarding the potential of Israeli airstrikes (with or without U.S. support) against Iran’s nuclear facilities.

And finally, within Iraq, minimally publicised Shiite-Sunni factionalism appears to run the risk of spilling over into a renewed civil war with the attendant danger of possibly drawing in Shiite Iran and Sunni Saudi Arabia — neither of whom are especially fond of each other to begin with.

At the same time, with the U.S. about to complete its role as a peacekeeper in the country, Maliki has yet to fill a number of ministry posts, given his concern about a coup emanating from potentially disloyal security units. As such, he remains personally in charge of the ministries of defence, interior, and national security.

Foolish take-away
I could continue to discuss potential difficulties in the oil-rich Persian Gulf area, along with other exporting countries, such as Libya and Nigeria. But you get the point: The Middle East and North Africa — and especially the all-important Iraq-Iran-Saudi Arabia region – remain very much a tinderbox, with the potential to drive crude prices to stratospheric levels.

Even if oil doesn’t go to $200, The Motley Fool has created a new special report, The Best Stock For $100 Oil. If you’re looking for Australian stocks to profit from the energy boom or an oil spike, Motley Fool readers can download the report for free by clicking here now.

David Lee Smith is a The Motley Fool  feature columnist. The Motley Fool’s purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

 

 

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