- Created on Monday, 13 June 2011 16:38
- Written by Sara Nunnally, Editor, Smart Investing Daily
- Hits: 1726
You know, gasoline prices are supposed to climb as we head into summer, but things are getting a bit ridiculous!
Gasoline prices are up nearly $1.06 a gallon from last year, and it's not even summer yet.
Why is this happening? Well, the Arab nations of OPEC are fighting...
OPEC decided not to produce more crude oil. Or rather, Iran and its cohorts blocked Saudi Arabia's efforts to try to boost production.
Aside from the crummy effect this had on crude oil prices just after the meeting last Wednesday, there are some bigger issues coming to the surface.
The Wall Street Journal reported:
An acrimonious OPEC meeting failed to produce an agreement to increase oil production despite tight supplies and rising prices, bringing to the fore long-simmering divisions between key cartel players Saudi Arabia and Iran and calling into question the group's ability to influence oil prices.
And the Boston Herald said:
OPEC's stunning admission of major dissent within its ranks has left it reeling and its status as the world's oil power-broker weakened -- perhaps beyond repair.
OPEC has already lost a lot of clout as crude oil production outside of its group has grown in the past decade or so. Places like Russia and Brazil have brought a lot of crude oil to the table. These countries aren't under the thumb of OPEC's production rules.
That said, OPEC's influence with global powers, however, shouldn't be forgotten.
I'm talking about the crude oil embargo in the mid-1970s that nearly brought the U.S. to its economic knees, and quadrupled the price of crude oil in less than half a year.
Saudi Arabia and other Arab OPEC members turned off the tap by 15% back in 1973, and markets went bananas... The "oil weapon" will always be a threat. But ill will between major OPEC producers has even bigger consequences.
That they are fighting now should be a warning to everyone. Saudi Arabia and Iran -- who are ranked as the top two Arab countries in terms of oil reserves -- are vying for power... and they have very different global views. Mainly, they deal differently with the West. Saudi Arabia works closely with the U.S., while the U.S. still has strict sanctions against Iran.
Now, these two countries are dealing with more than one crisis. Even though Saudi Arabia and its OPEC allies are calling for increased demand in the second half of this year, the world is using less crude oil because of the global financial crisis. Crude oil inventories in the U.S. are 7.5 million barrels higher than they were last year.
You could say the call to increase production would solely be a bid to lower prices. This rubbed some OPEC members the wrong way because some of them can't produce more crude oil quickly or cheaply. Iran is one of those countries.
Indeed, only Saudi Arabia and three other Gulf countries that are more allied with the West than other Arab OPEC members favored an increase in production.
Most of these countries don't want lower crude oil prices. This is because of the second crisis. The Middle East and North Africa are under siege from their angry citizens. When Tunisia and Egypt were successful in overthrowing their governments, other countries jumped on the uprising bandwagon. Yemen, Bahrain and Libya have all seen huge protests.
Of course, Libya is still in the midst of a global military intervention. Its oil production is still offline.
These countries need high crude oil prices if only to throw money at the masses, hoping they'll stop their protests.
Because of these two crises, OPEC is on the edge of a cliff. Some analysts are even saying that OPEC is dead.
But what -- if anything -- will this do to crude oil markets?
Immediately after the announcement, crude oil prices climbed nearly 3%. This pressure means higher gasoline prices heading into summer. As I told you, gasoline prices are nearly $1.06 per gallon higher than last year... And unlike oil inventories, gasoline inventories are down 4.5 million barrels from last year.
Translate this pain at the gas pump to other market investments, and you've got possible bearish outlooks for retail companies.
(Sign up for Smart Investing Daily and let me and fellow editor Jared Levy simplify the market for you with our easy-to-understand articles.)
On the other hand, domestic energy could get a lot of attention. Even companies doing business in friendlier countries like Canada could benefit.
Check out Apache Corp. (APA:NYSE) and Suncor Energy Inc. (SU:NYSE), up about 26% and 19% in the past year. These guys are heavy hitters without being 800-pound gorillas. They are outperforming their competitors and are a much better value than their industries as a whole.
Of course, these aren't the only opportunities to pop up in the wake of the nasty OPEC meeting. In fact, this first OPEC fracture could be the start of an even bigger crisis. Justice Litle, editor of Macro Trader just sent me a letter about the coming crisis saying:
I can tell you right now, we have never... EVER... seen this level of chaos on U.S. shores. This will put the financial crisis of 2008 to shame...
I don't have room to tell you what the rest of his letter said, but we're quickly working on a way to let you read it in its entirety. One thing I can tell you, though, is that Justice believes that the bigger the crisis, the bigger the opportunity.
As soon as this letter is available, I'll be sending you a link to it, so keep an eye out in your inbox.
Editor's Note: We could end up buying all of our oil from China in the next 5 years... The Chinese government just made a power move to undercut OPEC and the United States.
They're building a new "oil colony," with potentially more oil than Saudi Arabia. Over 100 billion barrels. For now, very few people know the location of this oil. If you invest right away, you could make a fortune as the world wakes up to China's plot. Find out how.
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