The Oil Economy Runs Only When Countries Are Stable

Jim Brown
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Crude oil prices have rallied from $85 to more than $90 in the last two days as violence in Egypt caused concerns about a contagion to other Middle East countries like Yemen and Saudi Arabia.

Just one trading day ago the price of crude oil was testing the $85 level on worries inventories were rising and OPEC was about to change their mind and increase production. Today, without any change in production and no interruption in deliveries anywhere the price of WTI crude is trading over $90. This is the power of perception rather than reality. When traders perceive there might be a disruption the immediate reaction is to buy crude futures.

The problem is not the 662,000 barrels per day that Egypt produces. The majority of that oil is produced 450 miles across the desert from where the demonstrations are happening. The worry is partly Suez Canal and partly Saudi Arabia.

The Suez Canal transports an average of 1.8 mbpd of crude and a stoppage of ships through the canal would add two weeks and about 6,000 miles to the delivery process as tankers are forced to go around Africa.

I seriously doubt the Egyptian military is going to let several thousand unarmed demonstrators shutdown the canal. This is a vital lifeline for nearly every European and African nation and the international pressure against Egypt would be immense. I believe the military will protect it at all costs. This is a false worry.

The second concern is for a similar demonstration flaring up in Saudi Arabia. Saudi's King Abdullah and the massive royal family are not well liked in Saudi Arabia. The increasingly younger population is embracing western values and like the citizens in Egypt they would like a change in the government. They see the royal family as taking the countries riches for themselves and living lavish lifestyles while the working class struggles. It is a common theme in the Middle East.

If similar demonstrations broke out in Saudi Arabia the king would probably not be as tolerant towards the demonstrators as in Egypt. Ruling with an iron fist could make matters worse. Saudi produces 10 mbpd and any civilian uprising could provide cover for Al Qaeda terrorists to attack oil facilities. Al Qaeda is already a problem in Saudi Arabia and the country is constantly defeating attack plans and launching raids to capture dozens of terrorists. Turn the country upside down with a large-scale demonstration and it would be that much harder to prevent Al Qaeda attacks.

The worry over problems in Saudi Arabia is premature but trouble is brewing in another neighbor on its southern border. Protests broke out in Yemen this weekend with pro-democracy demonstrators marching through the streets shouting "Yesterday Tunisia, today Egypt, tomorrow Yemen." The protestors were unable to sustain a mob when police blockaded the streets and a competing mob of pro-government supporters clashed with the pro-democracy protestors.

Many Yemenis have the same complaints as the Egyptians. President Ali Abdullah Saleh has ruled over the country for 32 years. In Yemen the living conditions are far worse than Egypt and government services are far worse as well. Civilian anger is far worse than Egypt but the civil society in Yemen is much weaker and the culture of popular opposition is far weaker.

Yemen has a small middle class and a large uneducated and illiterate lower class population. Social networking sites like Facebook that helped mobilize demonstrations in Egypt, Iran and Tunisia are not widely used in Yemen. There is a popular movement in Yemen but no support from the political parties leaves it fractured. There is already a rebellion in the north and a secessionist movement in the south and a resurgent branch of Al Qaeda. President Saleh has his hands full already but he also has full support of the military. This should prevent any further demonstrations from succeeding. Saleh survived a rally earlier this month in which thousands of protestors too to the streets calling for him to resign. With the military having what amounted to a test run just a couple weeks ago they should be able to control future demonstrations.

However, just the fact that Yemen is having demonstrations is a worry for Saudi Arabia. The country is much higher educated and that creates a higher risk of an uprising being successful. So far this weekend there have been no demonstrations in Saudi Arabia and the king came out in support of Mubarak. Saudi may have dodged a bullet this week but the forced changes in government in Tunisia and Egypt will be a topic of conversation for months to come wherever Saudi citizens congregate.

In late news on Sunday an OPEC delegate said the cartel will discuss production quotas when they meet in Saudi Arabia on February 22nd at an international energy conference. The delegate said all the OPEC energy ministers would be in attendance and it would be a prime opportunity to meet on the sidelines to discuss raising the production quotas. The delegate said OPEC would not take any action until the Egyptian problem was resolved because that was spiking prices unnecessarily. OPEC blames speculators for the price of Brent crude at $100 today. The same delegate said Saudi Arabia was now pumping 400,000 bpd over its quota of 8.05 mbpd.

I expect crude prices to decline drastically as soon as the Egyptian demonstrations end. Reports out of Egypt on Sunday night suggest the excitement has passed and there are very few people on the streets. The police have returned in force and appear ready to shutdown any new demonstrations immediately. While bad for Egypt in the long run it should force crude prices lower by Wednesday.

Jim Brown

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