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The Middle East Crisis: Egypt, Libya and Triple-Digit Oil Prices

[Editor's Note: Money Morning continues to bring you our latest analyses of the Middle East crisis. Now frequent contributor Dr. Kent Moors - a consultant to some of the world's largest oil-producing nations - tells you how the crisis will affect energy-related investments and outlines the profit opportunities the chaos will create.]

Given the events that we've seen in Egypt and elsewhere in recent weeks – as well as the developments we've seen in Libya in recent days – there's only one conclusion to reach.

We are right now looking at the prospect of significant and sustained instability in a region that's home to two-thirds of the world's known crude oil reserves.

The Middle East crisis – and the unsettling reality it represents – has already sent tremors through the international energy sector. Oil prices are on the march. And this is merely the beginning.

The problems will likely get much worse.

But forewarned is forearmed: Even if the Middle East crisis continues to escalate, we can predict how the global energy sector will be affected. In fact, if the crisis reaches the severity that I'm expecting, it will send the world's energy sector through three very predictable phases.

And each of those phases affords investors with very specific profit opportunities – if they know what to expect.

Oil Prices Already Zooming

Both Brent crude (the European standard) and West Texas Intermediate (WTI) – the benchmark for New York-traded crude-oil-futures contracts – are at their highest levels in more than two years.

After crossing the $110 threshold on Wednesday, Brent crude prices yesterday (Thursday) hit an intraday high of $119.75 in London.

And there's no reason to suspect those prices will retreat anytime soon.

Here in the U.S. market, oil for April delivery advanced for the sixth-straight day on Wednesday and temporarily eclipsed the $100 a barrel for the first time since October 2008 – because of worries that the unrest in Libya (the third-largest African oil supplier) would interrupt oil exports from that country.

That streak continued in early trading yesterday: The April oil futures jumped another 3.2% to trade above the $101-a-barrel level in early-morning trading in New York.

Only a week ago, oil was trading at less than $90. And the futures contract curve reveals that traders do not regard this as a short-term problem.

We have an escalating and contango market – one in which each month further out has a higher price than earlier months.

Oil prices are high. And they're going to get higher.

If ever there were doubts that exogenous (outside-of-the-market) forces could dictate trade, the current events will push them aside. The volatility will now kick in big-time – and that will further unnerve the already-skittish trading environment.

Tunisia and Egypt were disconcerting. But the events in Cairo may end up being the exception to the rule.

The unrest in Bahrain and Libya is far more dangerous. The unraveling of autocratic rule in the Middle East and North Africa (MENA) will not be a peaceful event.

With Libya, we have a major source – and one of the last sources – of light, sweet (low-sulfur) crude. This is most prized by refiners because it requires the least processing expense. There is just one other source. Unfortunately, that happens to be Nigeria – another country not known for its stability.

Libya is descending into civil war. The foreign oil companies have ended their activities there and have begun pulling out most of their personnel. As of 9 a.m. Tuesday, 6% of the country's production was offline.

Expect that percentage to grow.

Europe is directly in the path of this interruption – and will feel the squeeze the soonest – since it is the end-user for about 80% of all Libyan exports.

The bodies in the streets of Tripoli and Benghazi are a harbinger of what is to come. Unlike the army in Egypt, which served as a restraining influence, the army in both Tripoli and Bahrain is a weapon against the crowds and a virtual guarantee of further bloodshed. Neither Libyan leader Moammar Gadhafi, nor the ruling family in Bahrain, will be leaving voluntarily.

And that means a protracted struggle.

In Bahrain, however, it's possible that something much worse looms.

The "Perfect Storm" Experts Fear Most

In Bahrain, there is oil, but there is also the incendiary religious division – a Sunni minority ruling class against a majority of Shiites. Combine that with the acute economic problems experienced by average people throughout the region, and frustration is leading to rage.

As if that wasn't bad enough, Bahrain – from a strategic standpoint – happens to be located in the worst place for such an uprising.

It's where the U.S. Navy bases its Fifth Fleet, a primary component of U.S. Persian Gulf policy. If the fleet needs to leave, the departure will only feed into the already escalating regional instability.

However, the real problem is this.

Bahrain is a 665-square-kilometer archipelago directly across the water from Iran and connected to Saudi Arabia by a causeway. Tehran has almost certainly started to provide support to a Shiite uprising. But the Saudis will do everything they can to prevent one.

This is because Bahrain connects directly to the eastern province in Saudi Arabia that contains both its principal oil production and a Shiite majority. When Ayatollah Ruhollah Khomeini led the Shiite revolution in Iran back in 1979, the Saudis had to use its military to put down a revolution in that province. This time around, Riyadh will not wait for that to happen.

The concern over contagion – the spread of unrest throughout the region – is certainly genuine.

That means the volatility prompted in futures oil prices will be figured into the unfolding dynamic for some time.

The Three Phases of Triple-Digit Oil

There are three overarching considerations here. All three point to higher oil prices. And all three have manifested themselves already this week.

Let's take a look at each of them:

The Primary Hit: This will be taken by those oil majors with exposure to the region, and to the overall impact events in the region are having on the broader oil market.

The big boys will survive, but they will have to counterbalance developments unfolding in such places as Libya with production from other areas. That will take some time.

Watch the well-focused medium-sized and smaller-sized companies – particularly the North American operations. They will be the primary beneficiaries.

The Transitional Phase: The events unfolding in the Middle East and North Africa (MENA) will clearly create at least a near-term inducement for energy-users to transition from crude oil to natural gas. Expect primary natural-gas producers to experience a pop. The longer the crisis persists, the more time the transition between these fuels will have to gather steam.

The End Game and Alternative Energy: The above should also hold true with high-grade-coal holdings and alternative energy. However, there are other factors at work in both sectors. In the first instance (coal), there's the unwinding of the global coal picture, with Australian volume slowly coming back online after severe flooding. In the second (alternative energy), there's the length of time that's required to move significant renewable- and alternative-energy capacity into those sectors where rising crude oil prices would dictate a switch.

Yes, this is another reminder that ultimately we will move away from crude as the energy source of choice. But crises demand more immediate solutions; they rarely allow for a period of needed research and development (R&D).

Finally, at these prices, all sources of unconventional and synthetic oil become attractive – especially if they are outside the region that's coming unglued.

For North America, that means Canadian oil sands and American or Canadian oil shale are once again on the front burner. As the MENA sourcing for conventional crude becomes a rising issue, these alternatives that already are producing closer to home stand as a ready substitute.

It used to be a problem of prices being too low. But at triple-digit levels for crude on both sides of the Atlantic, that is no longer an issue.

[Editor's Note: When it comes to the global energy sector, Dr. Kent Moors is the ultimate insider. Not only is Dr. Moors a consultant to some of the world's largest oil-producing nations – as we noted above – he's also an advisor to six of the world's Top 10 oil companies. No wonder Fox News had him on the air to ask for his thoughts and insights Wednesday, shortly after a weekend in which the Libyan situation reached crisis proportions.

If you want to have that same opportunity – to hear what Dr. Moors thinks about the energy sector, the Middle East crisis, or the Obama administration's energy policies – you don't have to wait for his next TV appearance, or his next guest column here in Money Morning. You can subscribe to his "Energy Advantage" advisory service, which will give you regular access to his latest thinking and best profit ideas. For more information on the "Energy Advantage," please click here.]

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About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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  1. Jeffrey Michel | February 25, 2011

    Your write: "Finally, at these prices, all sources of unconventional and synthetic oil become attractive – especially if they are outside the region that's coming unglued."

    While oil sands and oil shale may dominate these unconverntional resources, their extraction is energy and water intensive. Less disruptive and closer at hand in many cases is CO2 injection into mature oilfields, the output of which may be increased considerably (Enhanced Oil Recovery). For this reason, companies like Denbury Resources should be of interest to investors.

  2. norm baxter | February 25, 2011

    Does this mean were never going to see gas go below three dollars again?

  3. Pete H | February 25, 2011

    Geithner and Bernanke are engineering a bubble in commodity and stock prices. The grand plan is to pop the bubble by raising interest rates and engineering a sea change in investment sentiment and collecting huge capital gains taxes from the sale of inflated assets. In particular, they are licking their chops on the prospects for huge capital gains in gold sales on which they will collect taxes at the collectible tax rate.

  4. John Argudín M. | February 25, 2011

    The immediate trend to a an approximate solution is (above all for certain countries as Spain, Greece, and Portugal) the quickest possible setting up of latest generation of nuclear present units. Waiting for the commercial development of the fusion system. But the core of the problem is Terrorism. Would it not be necessary a total war agains all kind of terrorists? After all they are unites os the basis, and always prone to help each other.

  5. Yew | February 26, 2011

    Pls add me

  6. Mark H. Bongo | February 26, 2011

    Is there any possibility that the Big Oil Company Owners will continue to increase their oil Prices?Isn't it that most likely Big Oil Company Owners are hoarding their Oils for them to sell their Oil when the Oil Prices are increasing?

  7. Lorne Marr | February 26, 2011

    The revolution in Libya, Egypt and Tunisia has caused that the Saudi Arabian king is prepared to provide benefits for his people. However, the question is whether it is not too late to come up with such a proposal.

  8. venitta | February 26, 2011

    high time to tell persons and companys how to save, turn thermostate down , build energy efficent, work credits to work near home, better hours for better gas consumptions and home use ( ie work early leave early) , car pool, longer day care hours, and more tax and family credits and creative ideas for all this so to save the earth, climate, animals and human existance, while using less but still making money…. give us some of these articles also plese

  9. Alix Berenzy | February 27, 2011

    The first and cheapest, longest- lasting source is the energy we can get is from simply using less of what we have right now. America has 5% of the worlds population yet we use 25% of the worlds energy. And the rest of the world aspires to be like us.

    Rather than dictate what people can and cannot do ( tho it may come to that) i wish we had… a new ideal of what is patriotic. As it stands now we seem to have the idea that " I am an American and i will drive any damn type car i want and use as much fuel as i can afford to use." So lots of our money goes to countries that have values we totally disagree with, as well as our soldiers and military resources . On top of it all, consuming really does not make us happy, it only feeds our desires for more & bigger things.

    I would love to see a "New Patriotism" adopted, where it would be a patriotic act to buy a smaller car or home, to spend more quality time with your kids instead of more money on things they have been brainwashed to believe they "need" to be happy . It would be so great if…our country could unite under this "New Patriotism" .

  10. era | March 9, 2011

    Advice for all of us:
    As i learned from that info, ii would like to say that:
    Spiritually, For every happenings there's a reason….
    Every one of us should watch our steps first, because someday, somehow we might regret

  11. maria | May 18, 2011

    ALL leaders of Middle east is responsible for that crisis ……

    do you know???

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