Let me start by saying I’ve been an oil/energy bull for a fairly long time, with portfolio weightings that support that stance.
The price of oil hinges on 2 factors. The first, fundamentals, is a fairly simple issue of supply and demand. The same can be said of a great many things. The other issue relates to currency valuations. For now, oil prices are denominated in US dollars, despite periodic grumblings and rumblings from various quarters, and it will probably remain so, at least for the near/mid-term future.
Let me try to shed a bit more light on the “simple” side; supply and demand. Those who cast a skeptical eye on thoughts of “Peak Oil”, “Cheap Peak Oil”, and any other permutations of the concept that the long term trend in pricing is up, will sometimes mention Iraq as potentially upsetting that particular apple cart.
There’s absolutely NO question the oil is there….and going by proven and probable estimates of reserves, Iraq is arguably the second largest source, behind Saudi Arabia, in the Middle East. Of course, Iraqi production suffered, first under the embargos and sanctions imposed on the Hussein regime, and then, from the war(s) that have devastated the country.
Some people argue that, as soon as some semblance of order is restored, Iraqi oil fields can start being developed to their full potential, and the price of oil will plummet, as the world becomes awash with the stuff (this is NOT a reference to the GOM spill).
CNN Radio had an interesting snippet today, from a spokesperson from the Iraq Oil Report, a website dedicated to all things having to do with Iraqi oil production, from the geological, to the political. It seems that a water shortage may well have a negative effect on oil production, as drought grips the region.
Here’s the link, for those interested: www.iraqoilreport.com/
This makes sense, as the Iraqi fields are “long in tooth”, for the most part. Typically, oil fields contain a mixture of oil and natural gas, and the gas is what provides the impetus to force the oil upwards. When the gas is exhausted, some amount of oil, often large, remains, but is “stranded”, so to speak. So-called secondary and tertiary techniques are employed to extract as much of the remaining oil, as possible. These techniques include water and/or CO2 flooding, to drive oil towards the wellhead. In the case of “heavy” oil, steam injection is used to raise the viscosity to make it flow more readily.
As mentioned earlier, the current drought in the region is placing and increasingly heavy strain on water supplies, which is wreaking havoc with agriculture in Iraq, (as well as throughout the region). It may come down to some tough choices for Iraq; water to feed the populace, or using it to help supply the world markets with oil.
Sources: CNN Radio
Iraq Oil Report
Disclosure: Long various oil stocks, pipelines, and tankers...none mentioned.