“It’s all happening now,” in the words of Channel Nine cricket commentator Bill Lawrie.
The Middle East, the most important oil producing region of the last hundred years-and still home to the world’s largest proven reserves of crude oil-has entered a state of protracted civil and military conflict. This is the geopolitical “game changer” that I wrote about last year in Revolution in the Desert. It’s radically changing the structure of the world’s energy markets.
Here are five recent events in the energy market that directly affect Australian oil and gas shares. Some of them are “big picture” trends for the long-term. Some are geopolitical. And some promise to fundamentally change the nature of the global energy market. Aussie investors can profit from all of them.
- North America on the path to energy self-sufficiency. “The US is on a path that will greatly reduce its demand for oil imports,” according to Christof Reuhl, the chief economist for British Petroleum. BP’s 2030 energy outlook reckons that North America’s energy deficit will turn to a “small surplus” by 2030. The big game changer: unconventional oil and shale gas.
- Chinese and French companies invest in US shale. Following BHP’s lead from 2011, French and Chinese companies are looking to develop technical expertise in shale gas extraction by investing in US projects. France’s Total invested $2.3 billion in an oil and gas venture in the US state of Ohio. China’s Sinopec, the second largest Chinese oil company by market capitalisation, announced a $2.5 billion deal with Oklahoma-based Devon Energy to develop new shale gas assets.
- Iran sanctions exempt British gas project. Officials in the UK and Europe are pushing the US Congress to exempt a $20 billion natural gas project in the Caspian Sea off the coast of Azerbaijan from sanctions on Iran. An Iranian company owns a 10% project, which means the flow of gas would be cut off from the project to gas-strapped Europe. BP is asking the US Congress to exempt the Shah Deniz II project from the sanctions.
- Iran threatens to close the Strait of Hormuz. “If any disruption happens regarding the sale of Iranian oil, the Strait of Hormuz will definitely be closed,” Iran’s Mohammad Kossari, the deputy head of parliament’s foreign affairs and national security committee, told the Fars news agency.
- Syria’s regime the latest to be swept up in the Arab Spring. One of Iran’s biggest allies in the Middle East, Syria, finds itself the latest Arab country be engulfed in civil war. The entire Middle East is now engaged in proxy wars between Iranian interests, Islamists, and factions backed by Western governments and oil companies.
The best example of the change sweeping the world’s energy markets is the growing relationship between Saudi Arabia (the world’s largest crude oil producer) and China (the world’s largest energy consumer).
Chinese Premier Wen Jiabao made Saudi Arabia the first stop on his tour of the Middle East in early January. While there, China Petrochemical Corporation (also known as Sinopec) signed a deal with state-owned Saudi Aramco to build a 400,000 barrel a day, $8.5 billion oil refinery near the Red Sea coastal city of Yanbu.
This is the New Energy Superhighway I wrote about in Revolution in the Desert. Chinese capital and infrastructure know-how are being paired with Saudi energy to change the calculus of the world’s energy markets. You can see how dependent China is on Saudi (and Iranian) oil from the chart below.
China’s dependence on Iranian and Saudi oil is one reason why China is likely to block any sanctions on Iran in the United Nations, if it comes to that. The Chinese are not interested in quarrelling with Iran. They’re interested in buying oil from it. And they’re not the only ones.
Unconfirmed reports on the Internet in January reported that India is negotiating with Iran to buy Iranian oil and pay for it in gold, not US dollars. India imports $12 billion worth of oil from Iran each year, or about 12% of its total consumption. India is the second largest export destination for Iranian oil. As I said, the report is unconfirmed. It’s interesting to think about anyway. India would not be able to legally buy oil in dollars from Iran if the UN approved sanctions. But the report claims UCO, a Kolkata-based public bank, could broker the gold-for-oil transaction outside UN rules.
What you’re seeing unfold is the breaking of the Petrodollar Standard. Oil has been priced in US dollars for years. The dollar pricing of oil forces countries like India, China, Saudi Arabia, and Iran to do business in a currency none of them otherwise use. With the US strategically disengaging from the Middle East (thanks to shale gas and the Arab Spring) the whole Petrodollar standard may be disintegrating. This disintegration will unleash uncertainty and opportunity in the world’s energy markets.
Dan Denning
Editor, Australian Wealth Gameplan
Publisher’s Note: Dan Denning will be appearing at After America: the Port Phillip Publishing Investment Symposium, March 14th-16th at Sydney’s Intercontinental Hotel.
Australian Wealth Gameplan subscribers have been profiting from what editor Dan Denning calls ‘The Revolution in the Desert’ since last June. And in this case, profit means two tips up over 120% at last count.
To get in on the action, click here.
From the Archives…
Picking the Big Investment Story for 2012
2012-02-10 – Kris Sayce
Attention: If You Have Australian Bank Stocks – Sell Them Now
2012-02-09 – Kris Sayce
Why This Bearish Indicator Means it’s Time to BUY Stocks
2012-02-08 – Kris Sayce
Why The RBA Uses The Terms of Trade Indicator… And Why You Should Too
2012-02-07 – Greg Canavan
Why the US Unemployment Rate is a Slippery Statistic
2012-02-06 – Dr. Alex Cowie
