Resource World Magazine

24 www.resourceworld.com A U G U S T / S E P T E M B E R 2 0 1 4 s p e c u l a t i o n s L e o n a r d M e l m a n O ne of the most important components of the worldwide social, economic and investment picture has been what might be termed the 'petroleum com- plex', namely, crude oil itself as well as other related products such as natural gas, heating oil, gasoline, lubricants, medicines, clothing, plastics, etc. Therefore, when several major influences that might directly affect the production and distribution of this group of commodi- ties suddenly and simultaneously appear, the world had better sit up and take notice. Presently, three events could, separately or in combination, directly impact the petroleum complex: conflicts between the Ukraine and Russia, political upheavals within Iraq and escalation of renewed vio- lence between Israel and its Arab neighbors. UKRAINE: This conflict erupted into public view when that nation's previous president decided to align himself more closely with Russia rather than the rest of Europe. The Ukrainian public strongly objected and rioting broke out, eventually leading to that leader's deposition. Russia reacted with threats of its own, culminating in moving its military into the Crimean Peninsula portion of the Ukraine and virtually annexed that region. The relevance to the petroleum complex is that Russia is now declaring it may with- hold supplies of natural gas from those European nations which will not support their point of view. This threat has the rest of the world scrambling for alternative supplies to those provided by Russia. The shooting down of the Malaysian passenger jet can only make things worse. IRAQ: This powder-keg of a nation erupted into open violence this spring when forces from the breakaway group, the Islamic State for Iraq and Syria (ISIS), advanced across the Syrian/Iraqi border and quickly captured several important areas of northern Iraq. This well-financed Sunni-based group now has their eyes set on taking over the capital city of Baghdad and then expanding into southern Iraq where major producing oil fields are located. These actions have generated fears of losing production from those fields. ISRAEL: Tensions in Israel, in relation to its Arab neighbours, have suddenly reached a white-hot level. Events began with the capture and murder of three Israeli youths and then were further fueled by the revenge murder of an Arab youth. Palestinian forces retaliated for the latter provocation with an accelerating barrage of rocket fire into Israel and that nation responded with mili- tary force aimed at destroying the ability of Palestinian organizations to launch attacks into Israel. The immediate threat is that if this situation escalates further, vitally important petroleum-producing nations such as Saudi Arabia and Iran could become directly involved. It is also worth noting that unrest is also on the rise in the oil-rich African nation of Nigeria. These threats to the efficient production and distribution of petroleum products are no minor matter. Since oil- based products are to be found in virtually every economic activity, the availability and cost of those products is of tremen- dous importance. As an example, when the price of crude oil soared to near US $150 per barrel in late 2008, the resultant dra- matic price increases for gasoline, heating oil, lubricants, medicines et al caused the level of consumerism to decline rapidly, thereby exacerbating the Great Recession of 2008-10. Also, since energy and transporta- tion are major cost components for many important industries, rapid petroleum complex price increases can also have a profoundly negative impact on overall eco- nomic performance as direct and indirect expenditures rise across a wide spectrum of economic activities. It is also interesting to note that petro- leum price performance is also reflected in overall inflation indexes and, therefore, there is an observable correlation between petroleum prices and performance of pre- cious metals. This was well illustrated by action from late 2008 through mid-2011. Crude oil prices, which had fallen dramati- cally to near US $30 per barrel during late 2008, began to rally steadily, finally reach- ing and holding above the US $100 per barrel level by mid-2011. During the same time span, gold soared from just under US $700 per ounce to well over US $1,900 per ounce. Canadian energy producers stand to profit substantially from recent fears which may serve to highlight the benefits of end- users receiving their supplies from a nation blessed with both political stability and rapidly increasing capacity. During the past few years many important Canadian producers have seen their share prices rally substantially and, given the growing politi- cal instability in Europe, the Middle East and Africa, it appears quite possible that this trend may continue for some time. The simple fact is that the world des- perately needs petroleum production. However, while it is of vital economic con- sequence, many prime areas of production happen to be located in politically volatile regions. That combination spells both opportu- nity – and danger. This material is taken from sources believed to be reliable and is provided for information only. Any investment decision should be made only after prior consultation with investment professionals. Leonard Melman is a financial and political writer who focuses on issues relating to the resource sector. Mr. Melman lives in Nanoose Bay, British Columbia, Canada and can be reached at lmelman@ shaw.ca Will volatile politics disrupt oil distribution?

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