Matt Insley

If you thought the Middle East was a powder keg before, just wait till you see what could be on tap for 2013.

There’s mounting proof that shows the whole region could be headed down a one-way path to disaster. As you’ll see, this could be the short fuse that sends oil to a brand new all-time high.

That said, let’s head where most analysts won’t. Here’s the case for $150 oil, in 2013…

It’s time to head down the wormhole. Today there are a lot of dots that need connecting – and with some new information hitting the street, it presents a specific opportunity.

In particular, this could be the end of the Middle East oil cartel as we know it – and surely, this will have an immense impact on global oil prices.

The story begins in Saudi Arabia.

Saudi, according to the U.S. Energy Information Administration (EIA), holds nearly “one-fifth of the world’s proven oil reserves” and currently sits at the head of the list for oil producing and exporting nations.

As it stands, Saudi is the “friendliest” and most stable of the oil producing nations in the Middle East. With that said, it’s safe to assume as Saudi goes, so follows the rest of the region.

Lately, Saudi’s position as top dog in oil production has come under some scrutiny. You’ve likely seen the reports from the International Energy Agency, Goldman Sachs and more, that predict the U.S. will out-produce Saudi Arabia (this could happen as soon as 2017.)

Regardless of when that forecast pans out, the Saudis and OPEC are starting to feel the heat from increased U.S. production. After all, with more oil coming out of the ground here in the U.S. the demand for Saudi oil heads lower.

Indeed, from the peak in 2003, the U.S. now imports approximately half of what it used to from the Saudis. (Note: that’s a lot of dollars NOT heading east.)

This trend is immediately affecting Saudi and OPEC’s ability to manipulate prices, too. With less demand for their crude, it’s hard to jack prices artificially higher.

Just to clarify, I’m not saying that the U.S. shale boom is going to cause world oil prices to plummet (as you know, I don’t think that’s the case.) But I do believe this unconventional oil boom in North America has shaved a premium off the price per barrel.

This premium, as you’ll see is vitally important to the Saudis.

Hold that thought.

In the meantime, Saudi Arabia has been smoking a lot more of its own dope. That is, with abundant and cheap oil, the country has increasingly been consuming its own oil production. Whether it be for power generation or vehicle use, the statistics are rather alarming.

Take a look at this chart, courtesy of the EIA:

Saudi Arabia, with each passing day, uses more of its own oil. Residents crank their air conditioners on hot days, modern conveniences suck up more kilowatts and car use is spurring the demand for more gasoline. It’s all adding up in a big way.

The sharp up-tick in consumption in recent years is proof-positive that the people like this government-subsidized “cheap” oil.

Just how much oil is Saudi Arabia using? A write-up in The Atlantic puts it this way, “It’s astounding to consider that Saudi Arabia, for example, has an economy one-sixth the size of Germany and yet consumes as much oil.”

After all, that’s what the Saudi subsidy does (it’s very similar to what happens in other emerging oil nations – and believe it or not, China – where most citizens don’t ever see a “real” price of oil.) Heck, if you and I were given subsidized gasoline imagine how much more we’d use!

But be warned, this cheap oil party in Saudi Arabia is going to come to an abrupt end.

Frankly, it can only happen two ways:

1. Give the oil to the people. In this scenario, the country uses so much oil that exports dry up (Citigroup suggests this could happen by 2032.) In short, this means the country no longer enjoys a constant flow of U.S. dollars – therefore the government struggles to stay solvent and pay for its welfare system.

2. Sell the oil to the world. In this scenario, the country realizes it’s using too much oil, in country, and decides to take action. The obvious action would be a cut of the subsidy. At that point the price for energy, in country, could double or triple.

Either scenario leads to an unhappy population. Either the government has no money and can’t continue welfare programs, or it cuts its energy subsidies and prices skyrocket.

The Saudi government will soon be sinking in a sandpit of unhappy citizens. And when the government gets neck-deep, something that could happen in the next 12 months, watch out.

A Convergence of Trends: Arab Armageddon?

Now, add restless natives to what we talked about above. Today, with more unconventional oil hitting the world market the Saudis are exporting less oil to the U.S., which is having a direct impact on Saudi’s ability squeeze a premium price from the market.

Without having that extra, say, $25 a barrel, the government is already struggling to keep pace. This gets back to something that Byron King calls “the breaking point.”

You see, if oil drops to $80 or less the Saudis have a hard time paying their ever-growing bills. In fact, just recently, Bloomberg reports, “Saudi King Abdullah promised to spend $130 billion on extra subsidies for housing and benefits as well as $500 billion for previously announced infrastructure projects.”

Rising budgets and shrinking revenue, as it tends to happen, won’t end well for this government.

And when things go awry (see: social unrest), and Saudi production is impacted, we’re talking about an epic impact on the oil market. Not to mention, if the whole region loses stability all bets on oil prices are off. Short-term, we could see a $150 easily – and higher prices aren’t out of the question. Compared to Arab Spring, this will feel more like Arab Armageddon.

Pretty ironic, huh? A fresh supply of U.S. oil puts pressure on prices and topples the Saudi government… leading to a short-term spike in global prices. Oh what a tangled web!

Keep your boots muddy,

Matt Insley

Original article posted on Daily Resource Hunter 

Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

  • Rusty Fish

    Let alone $150. It is still a hard ascend to grab the $100. Still, another grueling hurdle to clear at $120.
    Mid night it reaches $150, it would be overwhelmingly exhausted, investment environment entirely haunted and eerie. It may then switchover to automatic mode of descending willingly and unconditionally.
    Speculation has been recycling. Just how effective? Many a time, thunder may be astounding, water vapour fails to crystallize. We need to pull a long neck to bode well for a tantalizing rhythm of the rain.

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