David R. Kotok
February 28, 2011
Some folks look at the $100 oil price and conclude that it has stabilized and that everything will be okay. They argue one can now sell the oil stocks and go on to other sectors. They claim that Middle East and North African (MENA) problems are heading for the back burner.
Maybe so? However, at Cumberland, we‘re not ready to buy into that notion.
Young demonstrators that are visible on TV are located in authoritarian regimes where they are permitted to be visible. Egypt is an example. Bahrain vacillates with permissive demonstrations and repression.
Protestors in other regimes do not appear on our TV. They are being crushed. Iran and Syria seem to be the most murderous of this group.
Some regimes are trying to buy off the unrest; Saudi Arabia is the largest of these and has the most resources to do it. Other regimes are allowing some visible protest in an attempt to ease the pressure. They hope the demonstrators will get bored. Recently, Bahrain and Yemen seem to be trying this approach as an alternative to repression.
The Economist Intelligence Unit ranked 167 countries by their political structure. Data is compiled for 2010. Remember this ranking precedes the outbreaks in MENA.
Of the 20 countries in MENA, Israel was the best-ranked (lowest numerical score). It is listed as a “flawed democracy” with a world rank of number 37. Saudi Arabia (160) had the worst score among the 20 states in MENA. In addition to Saudi Arabia, the following countries (ranking score) were determined to be “authoritarian regimes” and poorly ranked. We will list from worst to less worse: Iran (158) Libya (158) Djibouti (154) Syria (152) U.A.E (148) Yemen (146) Tunisia (144) Oman (143) Egypt (138) Qatar (137) Algeria (125) Bahrain (122) Jordan (117) Morocco (116) Kuwait (114). (Thank you to Credit Suisse for data)
The Economist listed Iraq (111) Palestine (93) and Lebanon (86) as hybrid regimes. That is still a poor category but less bad than fully authoritarian.
This list offers no comfort. As we have written on several occasions, this turmoil is not over. Moreover, the outcomes and impacts are unknown.
Oil markets are temporarily settled at about $112 for Brent. WTI is about $15 wide of Brent. In time, that record wide gap will close. We believe that Brent is a “truer” price and that WTI is distorted because of inventory issues at Cushing, Oklahoma.
$100 oil is costly to the US economic growth story. We will see that impact appear over the next three months. Gasoline seems headed for $4 a gallon.
Meanwhile, forecasts of future oil prices range widely. The highest we have seen is $220 a barrel; that spike high would require Algeria to go offline in addition to Libya.
The lowest estimate we have seen is $30 in five years. That requires peace to break out widely in MENA. It assumes a massive expansion of new drilling in the US and elsewhere. It requires new alternate fuel technologies, solar, wind, nuclear power and shale oil growth.
The forecaster is hopeful. We are doubters. Granted< it looks like the US is about to issue a permit for deepwater drilling in the Gulf. It took almost a year. Litigation is probably ahead but, at least, the Obama administration seems to have realized that the US needs more oil. (Capital Alpha gets credit for the research)
As investment advisors, we will not follow either of these extremes. Money decisions require realistic scenarios and not hope for benign outcomes or responses to extreme fear.
We remain over-weighted energy and oil. We continue to hold a cash reserve. We expect more turmoil in the MENA region.
Keep an eye on the violence that affects the actual oil/gas infrastructure. Libya suffers; production is mostly shut down. An Iraqi refinery was attacked over the weekend. Two pipelines from Egypt were attacked in the Sinai desert; several battalions of the Egyptian army are now in the Sinai at the invitation of Israel. That means both sides of the Suez Canal are supposedly secured by the army. Algeria is currently the big worry.
In addition, let us add the following notion to the mix; the visible demonstrators are being seen in other sub-Saharan African countries where there is conflicted political pressure, low democracy index rankings and high corruption. They, too, are oil producers. They, too, have populations that can be manipulated by despots or “wannabe” despots. Keep an eye on Cameroon and Nigeria.
This is not over.
David R. Kotok, Chairman and Chief Investment Officer