.jpg)
Petrodollars! How Oil is making the U.N. Irrelevant to Iran and Putting Pressure on your Portfolio
Facing the prospect of economic sanctions by the United Nations and potential violent force from Western countries, Iran essentially told the U.N. to take a hike as it plans to move forward with its uranium-enrichment program.
Some would say this is a bold move by Tehran, but considering we’re talking about a showdown with the jellyfish United Nations, it is hardly a show of strength. If anything, it sends a message to the world that Iran could care less about potential economic sanctions because it’s making obscene amounts of money from higher crude oil prices.
Oil is the ultimate weapon
As the fourth largest exporter of oil in the world, Iran knows that its ultimate weapon isn’t a nuclear bomb but rather a barrel of oil. If Iran cuts off supplies to the world—even a small percentage of production—it would be catastrophic to the global economy.
Today, the world requires 84 million barrels of oil a day to survive and oil producing countries are only pumping 85 million barrels a day out of the earth. Any slowdown to this production (i.e., hurricane, war, etc.) would immediately cause a spike in oil prices and a collapse of all stock markets around the world.
You can see this reaction here in the United States. With talk about Hurricane Ernesto heading to the Gulf of Mexico, we witnessed oil prices spike and a drop in our domestic stock indices. Fortunately, the storm shifted to the east, thus maintaining oil production in the region and causing oil prices to settle down—and, more importantly, lift our stock markets higher. (Consequently, the S&P 500 hit a three-month high in the days after oil fell below the $70 a barrel level.)
“What to do” meeting on September 7th
Now, the concern regarding oil has shifted to Iran and it’s up to the world’s leaders to solve the riddles of this defiant country. A meeting has been scheduled for September 7th to figure out “what to do.” I wish them luck because if this situation isn’t resolved diplomatically soon, we’re going to have some serious problems with our portfolios as we close out 2006.
Investments will take a hit
Here’s why: After seeing higher oil and gas prices this summer, consumer spending dropped. This is because people have less discretionary income due to the fact that it’s costing $80+ to fill up their SUVs. In August we were somewhat relieved to see prices at the pump recede just a bit (average price per gallon of gas this week is $2.87, was $3.05 in June).
The drop in gas prices certainly helped with consumer spending as the Government just this week said spending increased by 0.8% in July. This uptick in consumer’s opening their wallets is partially attributed to the slight drop in gasoline prices. As a result, stores like Wal-Mart reported higher retail sales for this period. This morning, Starbucks even reported that August same-store sales were up 5%.
$100 a barrel, $4.00 at the pump
Now, let’s consider if Iran shuts off the spigot for exporting oil and tells the world—especially the United States—to go find the commodity somewhere else. Well, we’ll definitely see prices for crude come close to the elusive $100 price and have gas clip $4.00 a gallon in this country. Considering the holiday shopping season is almost here, retailers, for one, will be hit hard and cause a negative ripple effect on consumer staples.
Prices for crude at $100; gas topping $4.00 a gallon; potential for more violent conflicts in the Middle East—these are the ingredients for horrible market conditions and dire results for your portfolio.
Is there a way for investors to make money?
Yes, there is! Look at oil stocks; Companies like ExxonMobil (NYSE: XOM) and ConocoPhillips (NYSE: COP) because a quick solution for the United States to steer clear of further escalating issues with Iran is to get off of foreign oil. And—we’re close.
When the Senate returns from summer recess, they will be continuing the debate regarding off-shore drilling. It’s inevitable that this measure will pass, thus opening the door for companies like XOM and COP to move in and virtually save America from any price hikes due to further antics from Iran.
Regardless, though, it’s important to safeguard your portfolio during these tumultuous times. However, investors looking for some profit seeking moves to take advantage of higher oil prices and off-shore drilling, consider some of the blue-chip oil companies for your portfolio.
Have a safe and enjoyable holiday weekend,
Todd M. Schoenberger, Editor
Diligent Investor
Comments