$100 OIL?

Attacks against the Iraqi oil system continue to increase (see chart). As a result, oil production in Iraq is still well below pre-war levels and declining... (as is Iraq's electricity production). This pattern of activity is one demonstration of the shift from simple terrorism to global guerrilla strategies. The expertise gained here will likely be used to disrupt Saudi Arabian and Caspian sea production (the Saudi system offers substantial opportunity for cascades of failure). GGs are already flowing into Saudi Arabia from Sudan and Iraq. Additionally, they have begun aggressive operations again in Chechnya (near critical pipelines in Dagestan and Azerbaijan). Through these disruptions, global guerrillas will be able to gain pricing control over oil.

The impact of this disruption is likely to be severe given the window of vulnerability in the oil market due to insufficient production and high demand. In support of this, Adam Sieminski, Deutsche Bank's chief energy strategist, estimates that a major disruption of supplies would result in $80 oil. Two disruptions (a major attack on Iraqi and Saudi production), would result in $100 oil. This price, if extended for months, would result in a severe global recession.

While we can't predict a black swan event, we can anticipate events based on trends, capabilities, motivations, and unique periods of vulnerability.

Comments

[Mike]

Sieminski's views need to be taken with a grain of salt. He was certain, in 2000, that 20 - 25$ oil was out of the question.

If terrorists want to attack energy, a few bomb laden trucks driving into NORTH AMERICAN natural gas and oil plants would be far more effective. Some of these Nat Gas plants, for example, serve massive regions, and are completely unprotected. And darn easy to turn into fireballs and shock waves which would level square kilometers of space.

Forget about cutting off supply, cut off raw material supply, distribution, and refinery capacity here at home. The impact will be felt much faster than events overseas.

[Don Hodges]

$40 oil is already getting credit for the slowdown in consumer spending for July. A few months of this and the recession is probable.

[Watching Them, Watching Us]

How long do oil prices have to remain at over $40 a barrel to cause a recession ? How long before other non-OPEC sources of oil, which are too expensive to extract economically at the lower pre-crisis prices e.g. Canadian Athabasca tar sands, or deep sea oil fields, come on stream ?

One day $100 a barrel for crude oil will seem cheap - nature is not making any new petroleum at anything like the current rate of consumption.

Shouldn't developing alternative energy sources, energy conservation and chemical feedstocks be treated as a matter of national security and given the appropriate budgets ?

[JFTDMaster]

Oil prices are pretty inelastic short-term, but as the OPEC recession from 70's showed they are naturally pretty elastic over say a decade.

[JFTDMaster]

More on "guerilla war" and oil prices, this time from Nigeria

Nigeria's Petroleum Industry Reeling
http://www.lasvegassun.com/sunbin/stories/w-af/2004/aug/09/080901906.html

[Sean]

One interesting fact that has not garnerned much attention in the mainstream press (or even in the specialized financial markets press) is the fact that long dated oil contracts have been inexorably rising.

Given the relatively inelastic short term nature of crude oil supply/demand curves, it is natural that 'front' contracts exhibit much higher volatility that longer dated contracts. Indeed over the past 15 years, localized spikes in oil prices have been proportionately much more isolated to spot or short dated contracts. Yesterday you could hedge Nymex Light Sweet Crude for Dec2009 delivery at $36.13pbb...this is up from under $30pbb in June and as $27pbb only 3months ago: an increase of 33% !!!

And look at any of the hedge fund indices for that period...all flat or down...so the idea that it's only hot money pumping up the price is pretty weak.

Anyhow the point is, I don't think the public (or other financial markets) have realized that the hope of a 'return to normal/good ol' days' is just that a hope and the early/smart money has effected a major shift in the past quarter. Tick tick tick. If - and it is still very much an if -the S&P tanks sometime this fall, expect the forensic traders to look back and point to this rise in long dated oil prices as one of the culprits...

http://www.bloomberg.com/apps/news?pid=20602099&sid=aZvZbK7APzh0