Saturday, May 15, 2010

Pay No Attention to the Oil behind the Curtain: the Cheney Administration's Perfect Execution

Behind the excitement associated with the debt concerns of various countries in Europe, allegations of fraud against certain Wall Street titans, the over-heating of the Chinese real-estate market, and of course the record price of gold, there remains a tedious War Against Terror, that has finally dragged on long enough for the majority of ADHD Nation to stop paying attention. Meanwhile, it seems the success of the oil auction in Iraq early last year was timed perfectly, creating a windfall for American oil services companies Halliburton (HAL), Schlumberger (SLB), et. al., just before the market cycle begins to thaw and the stronger dollar begins to deplete the market-exchange value of oil (crude is hovering around $76, down from $87 two weeks ago). Having committed to a drilling backlog of 2,500-3,000 new wells per year for each of the next six years as well as to the development and maintenance of the pipeline and shipping terminal infrastructure that will support this massive number of new wells that will be coming online throughout this time period, it appears that the Chaney administration will have indeed succeeded in making Iraq the world’s largest oil exporter (not to mention putting a solid revenue stream in Halliburton's back pocket). The total value of these contracts may reach as much as $60 billion over the next six years, generating $1 billion in new revenues for each company per year.

Two offshore terminals are currently under construction already (first reported here back in 2009), and another two are scheduled to begin by 2013. Upon completion of all four, oil production in the country will go from the current 2.5 million barrels a day to an awesome 12 million barrels per day by 2016. [Official EIA list of top oil producing countries as of 2008]

Iraq’s oil production peaked at 3 million barrels per day in 1979, and then dropped dramatically after it invaded Iran. Saddam did very little to help the ailing situation thereafter, sucking and stealing what little financial nutrient remained from the teet of the severely broken oil fields at the expense of his own people. Year-end earnings reports from every oil engineering company involved in the region reported dismay at just how poor the state of Iraq’s energy infrastructure is after 40 years of neglect, essentially proclaiming that it all has to be rebuilt from scratch. Granted, I try to keep these proclamations in perspective—after all, common sense tells us not to ask a barber if he thinks you need a haircut. Nonetheless, SEC regulations do not permit falsification of facts of any kind in financial statements, and this is one area of government that is fairly well regulated. In the end, if the new Iraqi government can provide the necessary infrastructure (or at least the funding for American and European companies to build it) and political stability necessary to turn Iraq into another Saudi Arabia, we could very well be witnessing one of the largest changes to international trade in a great number of years as it will dump an incredible supply of oil onto the market, essentially putting a long-term cap on dollar denominated oil prices.

Flashback 8 years, and we can see why anti-war activists were the only voices confronting the feeble and unconvincing arguments that were allegedly holding up the United States’ declaration of war and the right to invade Iraq. Early in the planning of the war there was near-open discussion about the US’s ability to reclaim the cost of the war using newly freed oil exports; hence, Iraq’s oil fields were never targeted during either gulf war—well, at least not by the US.

Could it be that much of this philandering stock market entertainment and even the BP oil spill off the US coast is really just a big sideshow meant to distract us from the significant events taking place in the background? Come to think of it, back in 2002 wasn't Saddam Hussein threatening to begin only dealing Iraqi oil in Euro? Funny the Euro is imploding as I write this, down to 1.23354 from an intermediate high of 1.5141 four months ago. It seems the pieces are just falling into place. If I were rooting for the oil mongers and pandering politicos, I might be inclined to say "well done sir! Talk about planning to perfection."

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