Oil’s Secret Weakness

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Is it really possible for oil prices to spike much higher than they already have?

I’m often asked this question. It’s a fair question.

And the answer is yes.

Here’s why:

Oil prices rose Friday following reports of a terror alert in the petroleum-rich Persian Gulf region, though the incident didn’t rattle the market like it might have a few months ago.

A British navy official, speaking on condition of anonymity because he was not authorized to speak to the press, said Friday that a threat from al-Qaida last month to target Gulf oil terminals had resulted in stepped-up security and vigilance at Saudi Arabia’s Ras Tanura terminal, as well as a refinery in Bahrain.

I’ve written about this extensively here, so I won’t elaborate in this space.

But I will show you some pictures. Sometimes they say…well…a lot more than words. The graphs and charts below are taken from Saudi Aramco’s annual report in 2005 (click on “Saudi Aramco By the Numbers.”

They show what all the world nervously acknowledges: the world is hugely dependent on the export of refined and unrefined crude oil from just a few key oil fields and facilities located in the Persian Gulf. There may be other long-term solutions to the this crude oil dependency. But right now, these few key facilities are the feeding tube of economic growth–especially in China. That’s what makes them such attractive targets for terrorists. And it only takes once.

With lack of refining capacity in China…exports of Saudi refined products are crucial…

exportsofrefinedproductsbyregionaramco1_1.jpg

Total exports from the region keep the world’s petroleum economy going…

saudiexportsbyregion_2.jpg

Number one in global reserves with decisive impact on global markets and trading sentiment

crudeoilreserves_1.jpg

And finally…the vulnerable “chokepoints,” the targeting of which threatens the whole system…

saudioil_1.gif

p.s. A frequent mistake of options traders is to confuse probability with magnitude when it comes to pricing future events. And thing doesn’t have to happen often to have enormous consequences. In this case, just one successful attack on Ras Tanura would deal a real blow to global oil markets, both practically and psychologically.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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