Rising Oil Prices – A Problem for the World Economy

TECHNICAL SCOOP

CHART OF THE WEEK

Charts and commentary by David Chapman / Gold Seek

Charts created using Omega TradeStation 2000i.  Chart data supplied by Dial Data

Oil; black gold. Oil is the global economy’s lifeblood. Without it, the global economy would probably return to the 17^th century or worse. Oil demand just keeps going up. It is a constant battle to find new sources and keep what resources there are. Everyone is competing for it and wars have been fought over control of it to this day. It is undoubtedly the most political of the commodities.

At one time, there were constant stories about how the world was running out of oil. The stories were right. The world did run out of oil – cheap oil. In 1998, oil was trading for about $12/barrel. That was it for cheap oil. Over the next ten years, oil prices rose eventually reaching $147 in July 2008. Then came the financial panic of 2008 and oil prices had their own panic collapsing to about $34 in six months. The oil market was in complete disarray. But the low prices didn’t last long and by early 2011 oil prices were back over $100.

It took oil prices reaching $100 and largely staying there that helped increase oil supplies as new resources were found deep under the ocean, in the high artic, from shale fields and oil sands. There is a lot of oil there but it is expensive to get it out and the environmental dangers are high often extremely high. But the world needs oil and oil demand keeps rising every year. Today the world consumes roughly 90 billion barrels a day. Demand grows at roughly one million barrels a day year over year. The oil is not running out. The cheap oil has run out or is running down or is under stress.

Where is the cheap oil? The Middle East still holds the largest reserves and the most easily accessible oil. But the Middle East is also the world’s most volatile place that holds oil. The Middle East holds roughly 56% of the world’s reserves. And much of those reserves are the light sweet crude that is most prized. Canada has the world’s third largest reserves but a lot of is in the oil sands or it is heavy oil. Much of Canada’s oil is landlocked so the difficulty is how to get it to markets. In parts of the Middle East, the oil just oozes out of the sand. The markets are easily accessible. Roughly 20% of all the oil traded in the world goes through the Straits of Hormuz from the Persian Gulf that passes between Iran and United Arab Emirates. It is the world’s most strategically important choke point.

Many of the countries that are experiencing wars or turmoil are in the Middle East while others are in North Africa. Some of those countries include Iraq, Iran, Libya, Syria, Yemen, South Sudan and Nigeria. Iraq is slowly descending into chaos and could become completely ungovernable. Iraq produces or used to produce according to the EIA 3.4 billion barrels a day, the world’s 7^th largest producer. But that number is falling rapidly because of the current turmoil. Iraq has an estimated 143 billion barrels of reserves but if their oil industry could be developed, the actual amount of reserves could be two, three or four times that amount.

In 2003, the US invaded Iraq ostensibly because their dictator Saddam Hussein had weapons of mass destruction (WMD). Iraq had faced sanctions for years stemming from Gulf War 1 in 1990. Iraq was threatening to ask for payment for its oil only in Euros rather than US$ as was the accepted norm. The US$ has been called a petro dollar since the oil crisis of the 1970’s. Former Vice President Dick Cheney when questioned about the cost of the war declared that the war would pay for itself because of the oil once Iraq got back to full production. Dick Cheney was the former CEO of Halliburton (HAL-NYSE) a company that benefitted considerably by the war in Iraq and continues to do so today. Halliburton is one of the largest operators in Iraq today and one of the most significant and largest oil field services companies in the world. 

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