Libya's political turmoil yesterday (Thursday) continued to rage near the country's important oil patch cities, as Col. Moammar Gadhafi's military fought to secure ports and refineries.
Libya's government tried to portray a sense of security to foreign reporters who toured the Zawiya Oil Refinery Co. yesterday, even as rebel forces remained in place throughout the surrounding city.
Rebels also infiltrated Brega, an oil port in eastern Libya, as government warplanes struck the site, according to the Associated Press.
Gadhafi's son, Seif al-Islam, told the Associated Foreign Press that Brega harbor was the "oil and gas hub of Libya. All of us, we eat, we live because of Brega. Without Brega 6 million people have no future, because we export all of our oil from there."
Conflict in Libya and Egypt has already driven oil prices into the triple digits, and investors and consumers alike are worried about how much higher crude will go.
This scenario puts oil producing giant Saudi Arabia in the energy industry forefront, as it is the primary candidate to replace lost production.
Saudi Oil Minister Ali al-Naimi has said for years that the country has an upward capacity of more than12 million barrels a day that it can move into the markets.
Saudi Aramco, Saudi Arabia's state-run oil giant, last week pledged to move 700,000 barrels of oil into the export flow to replace the amounts lost from Libya, 80% of which were bound for Europe.
However, Money Morning Contributing Writer Dr. Kent Moors has said Saudi Arabia's actions won't be enough to keep oil from hitting $150 a barrel.
As a result, a Money Morning reader posed the following question.
Several commentators, Dr Moors among them, are predicting $150 oil this year. Yet there seems to be an undercurrent that the Saudis see such a price move as counterproductive to their interest, sort of like killing the goose that's laying the golden eggs. For example I've read stories that the Saudis will consider increasing their oil production in order to keep a lid on prices.
There is also the theory that skyrocketing oil prices will lead to the kind of price correction that we saw the last time oil prices spiked, which ultimately proved counterproductive to those oil-producing states.Any comments?
— Ted B.
Saudi Arabia's ability to keep a lid on prices is not as strong as some may think.
While some have recently questioned the country's actual amount of reserves, Moors notes that regardless of the true number, those reserves will face increasing pressure as global demand continues climbing.
"[Global demand] rates are now increasing faster than expected," said Moors. "OPEC [the Organization of Petroleum Exporting Countries] itself quietly raised its worldwide demand estimate three times in 2010. That's the first time in history that's ever happened."
Increased demand will restrict future growth of Saudi oil reserves, says Moors, meaning it alone won't be able to make up for lost demand.
"By 2012, soaring international requirements for oil may effectively reduce the Saudi surplus to about 2 million barrels a day," he said. "As stunning as it may seem to investors, Saudi Arabia might not have enough oil to go around."
Moors also pointed out that Libyan oil is light sweet (low-sulfur) crude, which is easier and cheaper to refine than Saudi Arabia's crude.
"So even if the volume concerns are met, the Saudi solution will still bring about an increase in prices for the end user," Moors said.
And even if Libya's unrest starts to subside, the domino effect triggered in the Mideast has caused more than a temporary boost in oil prices.
"The Middle East crisis – and the unsettling reality it represents – has already sent tremors through the international energy sector," said Moors. "Oil prices are on the march. And this is merely the beginning. The problems will likely get much worse."
As far as a price correction, long-term oil prices are expected to remain in triple-digits until significant changes occur in the global energy industry.
Moors said a transitional phase is beginning that will shift energy focus away from volatile crude oil dependence and toward natural gas.
"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," said Moors. "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."
As for investors, oil funds that rise with prices like the United States Oil Fund LP (NYSE: USO) should do well as prices go up.
And many are starting to look toward the energy industry future with alternative energy plays.
Money Morning Contributing Editor Martin Hutchinson advised investors that turning to Canadian tar sands oil companies, like Suncor Energy (NYSE: SU) and Cenovus Energy Inc. (NYSE ADR: CVE), would be a smart way to hedge against dramatically rising oil prices.
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.]
(**) Money Morning editors reserve the right to edit responses for grammar, length and clarity when posting on our Website. Please include your name and hometown with your email.
News and Related Story Links:
- Money Morning:
Mideast Crisis Update: Don't Count on the Saudi Oil Supply
- The Wall Street Journal:
Gadhafi Forces Maintain Control of Zawiya Refinery
- Associated Foreign Press:
Kadhafi son says bombing intended to frighten, not kill
- Money Morning:
$150 Oil: Four Ways to Profit as Crude Prices Rocket
- Money Morning:
This Middle East Meltdown Will Send Oil to $300 a Barrel – and Pump Prices to $9.57 a Gallon
- Money Morning News Archive:
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