Why I am bullish on the energy market

Energy analysts say the price of oil would start to soar and could rise 50 percent or more within days, according to New York Times. In a development that has edged the world closer to full-scale war in the Persian Gulf, European powers stated Wednesday that a tentative ban would be placed on exports to Iran. The European announcement comes on the heels of three very publicised long-range missile tests conducted by the Iranians earlier in the week.
It marks an escalation of sanctions against Iran for continuing to pursue nuclear materials enrichment program which many experts and government officials believe can only be aimed at the production of weapons of mass destruction. With more than 16 per cent of the world’s oil supply passing through a key shipping lane just two miles wide in certain places, Iran’s threat to blockade the Strait of Hormuz has already met with international outrage.
Some of the worst criticism has come from Iran’s own neighbours, among them the world’s largest oil producers who depend on the Strait of Hormuz for access to the Persian Gulf on a daily basis.
To close the Strait of Hormuz would be an act of war against the whole world, according to Sadad Ibrahim Al-Husseini, former head of exploration and development at the world’s largest and wealthiest oil company, Saudi Aramco.
You just can’t play with the global economy and assume that nobody is going to react in this precarious situation.
The response from the US State Department has been no less stern. In a recent interview,
David L. Goldwyn, former State Department coordinator for international energy affairs, said; “If the Iranians chose to use their modest navy and anti-ship missiles to attack allied forces, they would see a probable swift devastation of their naval capability.
We would take out their frigates.”
In total, 15.5 million barrels of oil pass through the Strait of Hormuz every day — including crude from Iraq, Kuwait, Qatar, the United Arab Emirates, and Iran itself. Almost 90 per cent of this daily volume winds up in Asia, with China being the most ravenous consumer by far. Although some military analysts have dismissed these threats as “empty talk,” Iran does have a history of leveraging international influence by disrupting or outwardly attacking ships passing through the Strait.
In the 1980s, the Iranian Navy mined the Strait and attacked Kuwaiti tankers hauling Iraqi oil into the Persian Gulf, a move that led the Reagan administration to intervene by escorting and, in some cases, re-designating Kuwaiti ships under the American flag. A modern repeat of what happened during the Reagan administration, however, would likely lead to far worse consequences. Given the level of tension in the Persian Gulf, any military engagements would likely lead to widespread hostilities that could disrupt global oil prices in ways not seen since the 1970s Arab oil embargoes.
Energy analysts have already predicted a 50 per cent plus jump in oil prices, even if a partial blockade were to be imposed by Iran’s 250-plus vessel navy. I have already predicted bullish trend emerging in the energy market since last year. This is much anticipated as such a radical shift in price could send average gas prices past the $4 mark in the space of a few days. Of course, the problem with situations like this one isn’t so much the disruption in commercial traffic as it is the trickle-down effect of the panic to all levels of business and industry. I don’t rule out the possibility of oil touching 2008 levels i.e. ranging from $130 to $147 /barrel in 2012.
Oil price spikes have been blamed for entire recessions, including one that lasted for most of the 1970s when the Arab world closed the valve on US exports in protest of the Yom Kippur War in 1973. Are we due for another one? It’s impossible to say what this standoff will lead to in the long term, especially given that the Iranian Government is making no friends in their own region. What I can say with almost total certainty with my connections in the west is that as long as sanctions against Iran are on the table, oil prices will be creeping upward. As they have been in the last week, since this heightened level of tension took hold.
This could mean one of two things for investors and countries to move further into the winter months. It could mean higher heating bills, more money spent on gas, more money spent on air travel, even more money spent on food and water, as shipping costs go up across the board. For a majority of people globally, this is will be the greatest lasting effect of a gradually deteriorating diplomatic climate. For some, however, an increase in oil prices — during a season when energy costs are already astronomical is a predicament that spells profit.
You see, thousands of miles away from the Persian Gulf, a brand-new generation of energy companies is laying the groundwork for a massive industrial resurgence, on American soil. Taking advantage of the Bakken Oil Shale formation — massive crude reserve which remained untouched during the first golden era of American oil — these energy companies represent the vanguard in fossil fuel production.
With at least three decades of upward production on the horizon, North American shale oil will still be growing many years after the Saudis, the Kuwaitis, the Iranians, and everyone else in the region has pumped their last drop. But don’t wait for OPEC heavyweights to start running dry. As we are all definitely heading in that direction, it won’t happen until the end of the decade (at the earliest). Instability like the kind we’re witnessing in the Persian Gulf at this very moment promises to shift the balance of the oil market back to North America long before the Arab oil empire goes into full-scale decline.

Shan Saeed is a financial market economist with 12 years of solid global experience based in Asia Pacific. He has graduated from Uni of Chicago, Booth School of Business, USA and IBA Karachi. Comments and queries: Blogs at www.economistshan.blogspot.com