How the Political Upheaval in the Middle East Impacts the American Pocketbook

How the Political Upheaval in the Middle East Impacts the American Pocketbook

The first thing we must do is separate the wheat from the chaff. Libya is different. Unlike the toppling of dictators in Tunisia and Egypt, and the continuing unrest in Bahrain and yes, Iran, the violence that has erupted in Libya, the 18th largest oil producer in the world, will have a more immediate and sustaining impact on the American pocketbook.

That became all too clear when on March 2nd, the Financial Times reported that half of Libya's oil producing capacity had shut down, causing an immediate shockwave in the oil industry resulting in oil prices escalating to $100 per barrel. Added to that is the fear that the current turmoil in Libya could spread to other major oil producers in the Middle East such as Saudi Arabia and possibly even Algeria.

As if to fuel the fire (pun intended), TIME Magazine reported last week that Colonel Moammar Gadhafi has also threatened to "blow up" Libyan energy pipelines.

As I shared with you last week, Libya produces just 2 percent of the world's oil, but, it is some of the world's most sought after highest quality crude. Today, Libya exports 85 percent of its oil to Europe while only sending five percent of its output to the United States.

On March 2nd, International Energy Agency (IEA) chief economist Fatih Birol said that oil prices are right now in the "danger zone and could rise further if the turbulence continues in the Middle East."

All of this political upheaval in the Middle East has certainly shed the light on the reality of our dependence on foreign oil and the limits of the oil reserves themselves. While neither Egypt nor Tunisia are meaningful oil producers, Egypt is certainly the region's chief refiner of crude while Libya is an important oil and gas producer. As we have all learned the hard way, the oil industry is a very complex industry and its performance is driven in large part by how politically stable the planet is. Unfortunately, for as much oil as we consume, Americans have little knowledge of how the oil market functions and we really don't have any appreciation for oil politics and economics until we pull up to the gas station and are either unable to pump or are forced to pay a huge price.

The unfortunate reality is that we as a people are largely clueless as to the correlation between the oil industry and our lives. We are ridiculously dependent on foreign countries for oil and the oil producing world is rapidly running out of cheap, easy to produce, high-quality sweet crude oil. The oil that is left is of a poor quality, is more expensive to produce and is frighteningly found in forbidding and difficult regions.

Right now, oil prices are escalating because there is a growing sense that the entire Middle East has become horribly unstable and that no one, and I mean no one, has any idea what the outcome will be. As far as Libya goes, it is very hard for the world to absorb even a two percent reduction in oil production. Industrial economies all over the world tremble at the thought of this kind of loss. For many years, oil production and consumption were relatively balanced, but now oil reserves are dwindling while the world is simultaneously consuming more oil. The Chinese people purchased more cars last year than we did here in the United States.

Just watching local news will inform you how the crisis has deepened. Among the first to suffer in an environment of escalating oil prices is the American trucker. They have to pay for their own diesel fuel and they will be unable to absorb the kind or price increases we are beginning to see right now. It cannot be overstated how much merchandise, goods and products truckers move around America. If they become unable to cope with rising oil prices, the goods are not going to make it to the supermarket. If that happens, then the stores have a problem and companies will be unable to pay their employees because without product to sell, there is no income for the supermarket.

If all this was not enough to worry about, there are other scenarios to be frightened of as well. The upheaval in Libya right now will only serve to inflame the region more. The more Colonel Gadhafi resists the wish of his people to step down and the more violence he provokes against his own countrymen, the more it will only anger and inspire people in neighboring countries. Saudi Arabia is extremely vulnerable. The King is over 86 years old and not in the best of health and his successor is over 85! There are branches of the Royal Saudi family that would love to see change at the top. If Saudi Arabia becomes too turbulent, it will be virtually impossible for the oil industry to function there. And, Saudi Arabia is our second largest supplier of oil.

Then there is the issue of "peak oil." This is the point of maximum oil production, either in a country, region or the world as a whole. Once you peak in your oil production, then the oil producer begins the slippery slide into an "arc of depletion." Some experts calculate that only about half of the world's oil supply is left. What causes the most dismay however is the reality that of this oil that is still in the ground, a very large percentage is economically unreachable for one reason or another. Add to that a chaotic international banking system; oil consuming nations are in a state of crisis regarding capital which can only mean that we are struggling to raise the money to even get to what is left out of the ground.

Should you be one of those who think technology will ride to the rescue, think again. The problem of the diminishing returns of the new technologies designed to drill more aggressively by horizontal drilling or even injecting nitrogen or seawater into rock to squeeze every drop of oil out of that rock just ends up depleting the oil fields more. The Saudis have already depleted their fields that way. In fact, they are no longer the number one producer of oilRussia is.

Some think that we will be able to identify and develop alternative energy sources. This may actually be part of the answer but we need to first finally accept the reality that to drastically reduce our dependency on oil there are behavioral changes we all have to make. Walk more; drive less; bring back America's trains without necessarily building them to be bullet trains; and turn to public transportation for the vast majority of our intra-city trips.

Of the roughly 16 million barrels a day of crude oil consumed in the U.S., about two-thirds of it ends up being used as fuel for transportation. Until we can figure out a way to run cars on electricity, or make the cars and trucks we drive go further on less fuel, we'll have a hard time weaning ourselves from oil.

That's why alternate energy sources like wind and solar which are used to make electricity aren't replacing nearly enough oil fast enough to kick our addiction to crude.

As always, I look forward to sharing with you again next weekright now however, I have to go and gas up.

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