Oil Prices Continue To Rise
“Luck can often mean simply taking advantage of a situation at the right moment. It is possible to make your luck by being always prepared.” -Michael Korda
I thought the above quote was particularly fitting as oil prices continue to flirt with the unheard of $100 per barrel level. Understandably, many folks are concerned about what impact expensive oil is going to have on the economy.
Thinking along these lines has brought to my attention a much bigger “oil worry” than $100 per barrel. My attention is focused on the political game that is being played half a world away. Unfortunately, it is receiving only passing coverage by the American press despite the potential major impact on all of us.
To what am I referring?
Iran. This Middle East powerhouse has been rattling their saber for some time now over nuclear power. They have announced intentions to develop a nuclear power plant to supply electricity to their growing country. The western world is concerned that this power plant will turn into a factory for either dirty bombs or full scale nuclear weapons.
The current situation has called for calmer heads to prevail. Political and economic sanctions have been threatened, and Iran is still asserting their rights. Unfortunately, whether we want it or not, the US is inextricably linked to the Middle East. The presence of our troops in Afghanistan and Iraq and the thousands more stationed throughout the Persian Gulf region practically guarantee it.
So, a little fact or two for you to chew on.
The Strait of Hormuz is about 35 miles wide, and it is situated at the mouth of the Persian Gulf. Iran sits on one side of the waterway, while United Arab Emirates and Oman sit on the other. 16% of the world’s oil production (about 13.4 million barrels) is transported through the strait every day. To put that in perspective, the US alone consumes approximately 10 million barrels of oil a day just to put gasoline in our cars.
Now most people have no idea where the Strait of Hormuz is, but I guarantee that if oil supplies are disrupted the entire world will be focused on this one little spot. The scary part about this whole scenario is that in certain areas the space that oil tankers can navigate is only 2 miles wide.
Iran has already threatened to disrupt oil supplies through the Strait of Hormuz if they don’t get their way. If they were able to shut down oil transportation for even a little while, oil prices could spike to over $250 a barrel. Think $7 or $8 dollar gasoline.
Some argue that alternate plans are under consideration. I have heard of two. One plan is to build a pipeline around the strait, which would take years. The other option is to release supplies from strategic oil reserves, which is only a temporary fix.
I estimate there to be a very small chance of the Iran / US conflict escalating toward military action. However, if something happens we should be prepared as investors. Knowing what trades to make in just such a situation will help us profit if these worst case scenarios come true.
Our first option would be to stockpile oil, but unless you own a really big storage tank, it’s not easy to do. Second, we can invest in oil exploration and production companies, but everyone has already done that and prices are extremely high.
My thought is to look at the shipping companies. No matter what price oil is at, you can only make money if you can deliver it. Shipping companies are designed for delivery. In the worst case scenario their services will be in higher demand and they will have the ability to raise their shipping rates. It’s definitely one space to keep an eye on.
Category: Commodities
