Get Comfortable, It Is Going To Be A Long Ride

Jim Brown
 
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The escalation of the Libyan conflict and attacks on oil facilities suggests this is not going to be settled soon. People in the region are now claiming they expect this revolutionary process to spread to the entire Middle East.

The national average for gasoline has risen to $3.56 and is projected to hit $3.75 as early as this weekend. Those pipsqueak economy cars are still not looking more attractive to me but with the outlook for the Middle East growing cloudier by the day we may have to bite the bullet and go economy class or plan on driving less.

The CEO of Kuwait Energy said she expects the wave of anti-government protests that caused political change in Tunisia and Egypt "will eventually engulf the entire Middle East." The majority of citizens in nearly every MENA country have been treated like slaves rather than citizens for decades. Dictatorships going by more politically correct names like monarchy or autocracy have run roughshod over the people. In most countries the predominate age of the population is now under 30 and in some countries as many as 30% of them are out of work and up to 50% are functionally illiterate. This is not a demographic that will continue to bow down to the demand of billionaire dictators getting rich off the oil wealth and under the table profit sharing deals with corporations trying to expand in their country.

Everyone has seen the results of protests in Egypt and Tunisia and they are watching to see if a truly democratic form of government emerges. In Egypt the military is still in control and it will be months before the true nature of the new government emerges and elections can be held. If any kind of democratic process can be developed that gives citizens a say in the government and gives them the opportunity to make a decent living then other countries are immediately going to flare up into new hotbeds of discontent and demand change.

Kuwait, a country already way ahead of countries like Egypt and Libya in trying to move their government into the 21st century is seeing demonstrations demanding bigger changes. If a progressive country like Kuwait is not perceived to be progressive enough then more restrictive countries are going to really boil like we saw in Egypt.

What this means in terms of oil production is unclear. Many of those countries don't have any material oil production but Kuwait and Saudi Arabia are OPEC pillars. The others are more of a nuisance factor than a real hit to production. As we have seen in recent weeks there can be a revolution without a shutdown to production as in Egypt. However, each uprising will rekindle market fears about the potential for a shutdown.

If Libya succeeds in destroying its ability to produce, transmit and sell oil then even a minor decline from other nations will make the pricing problem worse. In Libya the military loyal to Gaddafi struck with aircraft and artillery at opposition troops around the Ras Lanuf and As-Sidra oil facilities and large plumes of black smoke from major oil fires were shown on the news all day on Wednesday. The civil war currently in progress will likely end up revolving around the oil facilities. If the rebels control the facilities they control the money flow and Gaddafi can't let that continue for long. If the opposition continues to fight to hold them we can expect Gaddafi to become more aggressive and bomb his own facilities in order to deny the rebels any revenue as well.

This is a very likely result of what we are seeing now. It means Libya will not be a major producer of light sweet crude for possibly the rest of 2011. This means global inventories of light crude are going to decline and prices are going higher. We also heard this week that European refiners, who are going to be desperate to find sweet crude, told Saudi they could not use any of the oil Saudi had proposed supplying. Kuwait initially said they would produce more light crude then later said production would not increase.

OPEC is loving this set of circumstances. They can continue to claim there is plenty of oil and blame prices on speculators. This makes them blameless in their eyes yet they are enjoying $115 Brent prices. They know prices would go down if the committed to produce more even if it is not the right kind of crude but why bother? Collect the money and make the western world pay for inciting democracy in their sandbox.

Don't ever think the OPEC nations are our friends. Most hate us and they will gladly take any opportunity to extract a high price for their crude. This revolutionary wave is giving them that opportunity and it does not appear it will end any time soon.

You better get that limit raised on your credit card because it is going to get a major workout at the gas pump in the weeks and months ahead. Once demand increases during the summer driving season it is a pretty good bet we will see $4 gasoline on the coasts. You already know what comes after $4 gasoline. Yes, another energy recession thanks to our friends in OPEC.

Hopefully our leaders in Washington are seeing the trouble ahead and making decisions to accelerate drilling permits not only in the Gulf of Mexico but everywhere possible in the USA. Unfortunately I believe they will decide that new attacks on big oil because of their massive profits will be more politically advantageous ahead of the 2012 elections than actually doing something about the problem.

Jim Brown

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The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?

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