Under the heading "Get me another silver stake, Bubba, this sucker just won't die" is the continuing saga of geopolitical unrest and oil prices. And I guess it won't really ever die. But this incarnation seems much more dangerous than the rest, and it's not just in the Middle East. In fact, a scary scenario may be building.
As this is written, Saddam Hussein has pledged to suspend Iraqi oil exports for 30 days. That and Opec's apparent resolve to hold quota levels have pushed the price of crude to US $27/bbl. That will get the market economists attention, as always. However, it could be just the tip of the iceberg. Two wild cards could still be played.
First, of course, is the danger of an escalated Middle East conflict - either initiated by Bush against Iraq or spilling over from the Israel-Palestine disaster. Either way, prices on the north side - maybe the far north side - of $30/bbl would be a certainty.
But there is more. The truly wild card in the deck is Venezuela. Neo-fascist nut case Hugo Chavez has just canned more senior PdVSA management, planning to replace them with "capable" military people. It probably doesn't amaze you then that the workers at PdVSA are up in arms, threatening to strike, and worse. Work stoppages already have curtailed tanker loadings in Venezuela.
With PdVSA bereft of qualified management, the country in a shambles and the PdVSA workforce disillusioned, worsening supply disruptions are not only probable but most likely inevitable. The situation in the Venezuelan industry is so bad that at least two substantial service and supply companies have moved South American operational headquarters out of the country because of falling business and slow or refused payment of invoices.
So here's the worst-case scenario. Iraq continues to withhold production from the market (2 million b/d of oil), an escalating Middle East conflict removes 2 million b/d more (a guess), and the Venezuelan infrastructure collapses completely, taking out another 3 million b/d. Suddenly, in a matter of a few months, or weeks, the world is 7 million b/d short on oil. Strategic reserves won't cover for long; within a matter of days - weeks, tops - the oil price is past $40/bbl and headed north like an express train. And there is no excess capacity to tap since the Middle East crisis has, understandably, rendered producers there less than cooperative.
From there, you know how the scenario unfolds, especially if you were around in the early 1970s. Money pours in to speed up development of production in Russia, West Africa, the deepwater Gulf of Mexico and other high-potential areas. More money goes to develop otherwise marginal reserves in less attractive places. Then the crises moderate. The Middle East cools down, and Venezuela recovers under new leadership. Their oil hits the market again, in lower volumes initially. Within a year or two of the crisis, the price of oil is at $12/bbl again, and falling.
If this sounds too familiar, it is because it has happened, in various altered scenarios, over and over. However, a new factor is involved. The progress of technology - higher exploration success ratios, fast-track technology and improved recovery ratios - has shortened the time to peaks and valleys. Now the cycle is shortened and the effect heightened.
The scenario above may not unfold. Let's hope it doesn't. But if it does, the roller coaster ride will be worse than before. And, of course, it won't be the last one.

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