The philosopher Jean-Jacques Rousseau once said, “The more things change, the more they stay the same.”
I’ve been thinking about what Rousseau said because I have passed an anniversary of sorts. Thirty-years ago this past spring I was trying desperately to keep my grades up as a junior at the University of Calgary.
One afternoon the sun was beating into our classroom. It was a petroleum-economics class taught by a Frenchman, Dr. Mitra. But that day was unusual because the professor was agitated. This was most strange. The only agitation I had ever seen in that class came from the students who regularly received Cs and Ds from the white smocked, pipe carrying Dr. Mitra.
As the bell rang, Mitra exclaimed: “This thing in Iran… this Khomeini; it changes everything!”
I don’t remember what I thought of this. I was young and selfish, so I probably wondered if it would affect the final I was already cramming for. It turned out that Dr. Mitra was talking about a lot more than a final exam for one of his classes.
It was the late 1970s, the stock market was in crisis, there was a young inexperienced Democrat sitting in the Oval Office and, oh yes, a pop star that some called “The King”, had died prematurely—of a drug overdose in his home, they said.
Back to the Future
Years later I think Dr. Mitra was saying the revolution in Iran would permanently change the markets. That nothing in international oil would be as it was before; that the removal of the Shah and a new clerical regime with its Supreme Leader would transform the Middle East.
He was right.
In 1979 the Iranian Revolution sent oil prices soaring. The country’s oil production plummeted drastically to 2.5 million barrels a day. The 1980 Iraqi invasion worsened the situation. In fact, combined production of both countries fell to just 1 million barrels per day compared to 6.5 million barrels in 1978! This lowered the global production by 10 percent, and oil prices rocketed to $36 per barrel.
Today Iran is on the brink of another revolt. America is getting ready to pull out of Iraq, a move that could throw that country into chaos. With violence escalating in both nations—countries that produce 12 million barrels of oil per day, an amount almost equal to what America imports—the ordinances are set for another price explosion.
In fact, there is a growing potential for a new terror to boil-over in the Middle East… a nuclear kind of terror.
Just how close Iran is to having operational nuclear weapons is unclear. But one thing is certain; Israel is taking the threat seriously. Last month former Israeli defence minister Shaul Mofaz told Israeli radio that Iran is a ballistic power close to becoming a nuclear power.
“Iran has undoubtedly passed beyond the point of no return, moving closer to the ultimate nuclear capacity everyday," said Mofaz.
We are talking nuclear missiles in a region that holds two-thirds of the world’s conventional petroleum reserves. It’s enough to give American strategic planners nightmares. It also sets up the biggest potential for oil and gas profits ever. A scenario that I believe will push crude oil past $150 per barrel and natural gas above $8 per 1,000 cubic feet.
Then, on July 10th, Israel issued a direct warning to Iran. It spelled out the catastrophic consequences if it attacks the Jewish state with weapons of mass destruction.
In an interview published last Friday in the Hebrew daily Ha’aretz, Israel’s national security advisor Uzi Arad said Israel must have "tremendously powerful" weapons to deter or retaliate for a nuclear strike.
In other words, touch us and we will wipe you off the map.
To read more of Israel’s sword-first diplomacy, go to: http://www.voanews.com/english/2009-07-10-voa10.cfm.
In 2009 Iran’s Crisis is an Even Bigger Threat
My office sits 20 minutes from Calgary’s core and I try to get downtown as often as I can. Last week I was at the Canadian Unconventional Oil Forum held at one of the city’s fancier hotels. It’s not so much what you hear from the speakers as what you hear at the bar—coffee, juice or otherwise.
I ran into an old university buddy during a break. He heads up a mid-sized oil and gas company that has more than 100 million barrels of proven reserves.
“If there’s trouble with Iran, it’s going to be a real mess,” he said. “Look at Bush and that Iraqi thing. That was about oil. And if this thing in Iran gets out of hand, the U.S. will be in there too. They’ve got no choice.”
I asked him if I could quote him.
“Sure,” he said as he walked back towards the lecture theatre, “just don’t use my name.”
The fact is America’s fortunes are tied to Iran and the Middle East. Consider this:
- The United States accounts for less than 4 percent of the world’s oil production but consumes more than 30 percent of world oil supplies.
- The average oil well in the continental United States pumps less than 300 barrels per day. The average well in Iran produces 10,000 barrels per day.
- The last elephant oil field (more than a billion barrels) discovered in the United States was in Prudhoe Bay, Alaska in 1968.
In fact, 2009 marks a milestone for the United States. For the first time since World War II, we pumped less than 5 million barrels of oil per day. We pumped almost twice as much oil 30 years ago during the first Iranian crisis.
As Thomas Wolfe said, we can’t go home again
Meanwhile, Iran remains an oil kingpin. It is the de facto leader of OPEC, has the second largest conventional oil reserves in the world and is the world’s fourth largest producer of crude.
Yet in the end maybe Rousseau was wrong, at least in this instance. Things haven’t so much stayed the same, they have gotten worse. And that is bad news for America which lately has only shown talent for one thing—pumping money.
It is however good news for petroleum investors. The first Iranian revolution doubled the price of crude oil. Today, with America so much more dependent on the Middle East and with the stakes so high, the upcoming price spike could be huge, perhaps putting oil above $150 per barrel. Any way you look at it, that’s an A+ for energy investors.
Yours for real wealth,