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Look, Another ‘Crisis’ That Won’t Hurt Energy Stocks.

Look, Another ‘Crisis’ That Won’t Hurt Energy Stocks

If the day ends in a ‘y’, you can be sure there will be another crisis to hit the energy markets.

The latest crisis is Iraq.

A bunch of Islamist militants are seeking to take over the country.

That poses a threat to Iraq’s oil supplies.

Without Iraqi oil, the world economy could grind to a halt and the oil price could go to US$200 a barrel.

Hang on a minute. It feels as though we’ve gone back in a time machine to 1999.

That was when OPEC and Middle East oil was important. But today, there are plenty of other places to get oil. This crisis is yet another scare that won’t have any impact on the world economy whatsoever…

The oil and energy story is one of our favourite subjects.

We’ve followed it closely for a number of years.

The oil and energy markets have changed a lot over the past 15 years. And yet when you read many of the news stories about the current problems in Iraq, you’d think that nothing has changed.

There’s a reason for that. It’s not the job of the mainstream press to let their readers know that things have changed. The mainstream press know that most people don’t like change.

Most people like to think that things have been, are, and always will be the same. It makes them feel comfortable. So it’s up to the mainstream press to reassure their readers that things are the same. That way their readers won’t get scared and start looking around for answers.

But things have changed…and there’s no getting away from it.

Big differences between 1999 and today
There are two major differences between the oil industry of 1999 and the oil industry of today.

The first is technology and the development of new techniques such as hydraulic fracturing (fracking).

People label a lot of new technology as revolutionary. But not all of it truly is revolutionary. It’s another one of those over-used terms.

(If you want to check out some of the most revolutionary technology on the planet, look at some of the stuff Sam Volkering writes about on a daily basis in his free eletter, Tech Insider.)

Fracking is a genuine revolutionary technology. It has meant oil explorers can exploit and recover oil reserves that were previously inaccessible using conventional drilling techniques.

And fracking itself only really became possible as a result of the earlier tech development of directional drilling. That was the ability for drillers to ‘steer’ the drill bit a mile or more beneath the surface.

With these innovations, the dynamic of the oil market has changed. Explorers and producers can drill deeper, and into harder rock formations. The fracking process allows the drillers to fracture the non-porous rock so the oil (and gas) can flow to the surface.

Nowhere has this technology been more widely used than in the US, where drillers have been able to release oil and gas trapped in shale formations.

This has revolutionised the US energy sector to such as extent that oil giant BP [LON:BP] says the US will be energy self-sufficient within 20 years.

How $100 oil solved the oil crisis
The other key difference between today and 15 years ago is the price of oil.

In 1999, the oil price was below US$20 per barrel. Today it’s above US$100.

That difference is important. And it’s to do with the innovations we’ve mentioned above.

At US$20 per barrel, many oil deposits just weren’t economical for private companies to drill. If it costs a driller US$30 per barrel to get the stuff out of the ground, it will lose money if it can only sell it for US$20 on the market.

Of course in the Middle East, where it’s generally state-subsidised oil companies doing the drilling, making a profit isn’t important. They can subsidise the losses elsewhere, such as through taxation or borrowing.

Publicly listed companies don’t have that luxury. They have to make a profit to survive. If the cost of production exceeds revenue, they won’t drill.

So when the oil price began to climb through the 2000s, it had a major impact on the profitability of ‘stranded’ oil. That is, oil that the drillers couldn’t economically recover at lower prices.

But with oil at US$100, suddenly it was economical to recover the stranded oil.

It’s for this reason that the West is slowly weening itself off Middle East oil. And as long as prices stay high for the near future, it will stay that way.

Market forces restore supply and demand balance
The fact is that on average last year the world used 91.6 million barrels of oil per day. It produced roughly 91.4 million barrels of oil per day. So there isn’t a big difference in supply and demand.

So you read news reports, such as this from the UK state-run broadcaster, the BBC, it naturally raises concerns:

The price of Brent crude spiked on Friday over concerns about the ongoing insurgency in Iraq…

Insurgents have taken over two Iraqi cities, prompting the US to say it was considering “all options” to help Iraq.

Iraq is the second-largest oil producer in the Organisation of the Petroleum Exporting Countries (OPEC) group.

That sounds like a big deal. Except that Iraq only produces around three million barrels of oil per day. According to Businessweek, Iraq exports most of that from the Persian Gulf port of Basra in the south of the country – an area so far unaffected by the insurgent groups.

But even if terrorism or civil war resulted in every last drop of Iraq’s oil not reaching the market, what would be the impact?

For a short while, it would likely mean a higher oil price. But do you know what? That’s all the market would need to encourage existing producers to produce more oil.

That’s how the market works. It’s unlikely that every drill rig in the world is running at full capacity. Oil companies produce enough oil to meet demand. If they produce too much it would force the price down, as they or their customers would have to store the oil somewhere.

But soon enough, after the price spike the price would return to the ‘pre-crisis’ level as the market realised there wasn’t a supply crisis after all.

The crisis that isn’t a crisis
This isn’t the first time Middle East oil supplies have been under threat. And if the West keeps meddling in the Middle East’s business, it won’t be the last time either.

But through it all, despite the fear and nonsense about peak oil and a global energy crisis, the free market and entrepreneurs have always found a solution to every energy problem.

Whatever the mainstream says about the latest so-called Iraq crisis, the market will find a solution this time too.

Cheers,
Kris Sayce.
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