Investment opportunities in the energy sector always bounce between questions of available supply and prospects for demand.
These days many commentators in the U.S. are viewing excess domestic shale gas and tight oil as a factor in restraining energy prices. Meanwhile, their colleagues in Western Europe forecast continuing economic malaise, translating into a similar result.
Both put forward the position that there is a surplus of oil and gas in a weak global economy, thereby reducing concerns over either supply or price.
I have questioned those premises before here in Oil & Energy Investor. And I agree that there's no crisis situation emerging any time soon. The prices may not remain as low as some believe, but supply isn't going to be an issue in North America or in the European Union.
But the same can't be said about other parts of the world. And it's this wave of unrest that may have repercussions across the entire energy sector.
Arab Spring Sows Fields of Discontent
Energy has become a central concern in the return of what some have called "Arab Spring: The Sequel."
Little was actually resolved the first time around. Governments were displaced, a tyrant here and there separated from his rule, and popular movements morphed into the next battlegrounds. But where all of this will end up is anybody's guess.
Actually, each uprising has sprung from separate roots, has had different local targets, and is undergoing transformations into distinct power vacuums.
It's this last consideration that may be the most significant for policymakers in places like Washington and Brussels. Popular uprisings make for great headlines but terrible direct routes to stable political outcomes.
And that's without any other problems to cloud our understanding of where events are moving and what the outcomes are likely to be.
As we experience the first phases in another round of unrest in these emerging economies, another challenge presents itself that only heightens the stakes. . .and reduces the time available for a peaceful resolution—growing energy distribution issues in these economies.
Part Deux: Picture Cloudy, with Conflict
Some locations are the same as in the initial period of unrest—the one that began in late 2010-early 2011 with the toppling of a despot in Tunisia.
North Africa remains a hotbed. Qaddafi may have departed the scene in Libya and Mubarak in Egypt, but the situation on the ground is deteriorating. Both have energy issues as major components.
In Libya, the issue is who controls the flow of oil and, to a lesser extent, natural gas. The country remains one of the last major sources of highly desired light sweet crude in the world.
The other primary producer is Nigeria. Unfortunately, that West African nation is moving again into civil division, with Al Qaida groups in the north waging a war of terror while the Delta region in the south descends into civil war once again.
In each, control of black gold is serving to divide already weak civil infrastructures.
However, the crisis in Egypt is of quite another variety. There, despite encouraging reserves of natural gas (especially in the Nile offshore region), the country is experiencing massive power shortages. Rolling brownouts are intensifying. Officials are now openly talking about a network-wide collapse of the national grid.
Add to this the nation's highest court determining yesterday (Sunday) that the latest parliamentary elections were invalid. The decision further paralyzes the functioning of the national government and guarantees the escalation of "street" politics, that is, citizens (and law enforcement) taking to the streets.
The energy crisis is also central to rising tension in other places in the region.
Pakistan, never known for its political stability, has been in a full-blown energy disaster for some time. Unfortunately, this time it's beginning to show signs of bringing the infrastructure down with it.
Attempts to build pipelines for the import of gas from Turkmenistan and Iran have yet to materialize, while plans for liquefied natural gas (LNG) terminals have been similarly stymied. There's now no part of the country with guaranteed power or sufficient fuel upon which to build a reliable industrial base.
The real danger here: the rising inability of the central government in Islamabad to provide for basic energy needs and, thereby, essential services. This is a primary justification for areas never under solid central control anyway to move away from the national government even more.
The lack of functional national energy infrastructure isn't going to result in immediate civil war in Pakistan. But what's fast approaching is in many respects worse.
Regions will effectively become autonomous, with local clan and tribal leaders becoming de facto rulers. Such a "Balkanization" will rapidly increase risk and lower its ability to act or negotiate as nation state.
Pakistan Becomes a Global Security Fulcrum
Pakistan's geographical location—its neighbors are Iran, Afghanistan, India, and China—guarantees that unrest there will trigger cross-border problems. For example, Iran has a collapsing oil and gas sector reeling under Western economic sanctions, and India has a mushrooming energy shortfall.
For its part, China has to provide accelerating amounts of energy for its huge population and manufacturing interests. Thus far, it has moved into other countries by acquiring producing assets or entrance into joint ventures. A power vacuum on the other side of the border, however, could well change Beijing's policy dynamics.
Turkey is the latest to explode. As of last evening, 67 of the country's 81 provinces have experienced protests, particularly violent in Istanbul, Adana, and the capital Ankara.
The unrest is not sparked by an energy shortage. Yet even here, the energy issue is of central importance. Turkey is quickly becoming both the major regional player (thanks to the rapid decline of both Egypt and Syria) and the central throughput venue for Caspian and Central Asian oil and gas to global markets.
That means paralysis in Turkish politics will translate into energy pricing and supply concerns in short order.
As we watch a new chapter in street politics unfold in an already beleaguered part of the world, the position of energy looms large. And that is likely to impact upon investment prospects even if the main sources of oil in the region remain insulated from their own brands of "Spring."
Bottom line: You need to see the whole picture before you can understand what makes for a good investment. Opportunities are both good and bad. The more accurate information you have, the better you can discern one from the other.
Oil & Energy Investor