| June 21, 2014 | | | | | | | |  | | | | Ways to Play the Middle Eastern Meltdown | | | | | - Your editor, Peter Coyne is getting hitched today! In his place our own Byron King has agreed to stand in and update you on the Middle East's meltdown… how it affects America's domestic energy production and how you can play it. (Hurry, by 3:00pm we may have found the few readers we're looking for)...
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June 21, 2014  Byron King, filling in for Peter while he gets hitched...
Believe it or not, your editor, Peter Coyne, is getting married today at Loyola University right near Daily Reckoning headquarters. He'll be headed down to our beautiful Rancho Santana for his honeymoon. And he'll start reporting in from there on Thursday.
In the meantime, seeing how you've been reckoning about our shale boom and the New U.S. Age of Wealth this week, I thought I'd fill in for him. I'd like to update you on what's happening in the Middle East.
Iraq is breaking into three regions defined by ethnicity and religion -- Sunni, Shia and Kurd. It's along lines that I've described over many years, in my "Oil War" scenario
Oil prices are moving upwards across the world. Still, close to home, we have fracking in North America... and not a moment too soon. As with "Oil Wars," I've followed the fracking and technology phenomenon here in the pages of the Daily Reckoning, as well. Looking back six years or so, that three million "extra" barrels of oil per day in the U.S. -- all from fracking -- is equivalent to what Iraq produces. | Looking back six years or so, that three million "extra" barrels of oil per day in the U.S. -- all from fracking -- is equivalent to what Iraq produces. | Don't get comfortable, though. Everything is related to everything else. We may have slightly more domestic "energy security" in the U.S. and Canada than a few years ago; but we'll experience global price shocks as things unfold. I'll go into more details, below.
To begin, however, consider what this all means to you, and to your investments and investing strategy. Where do you go from here? Let's think it through -- as we approach the longest day of the year, here in the Northern Hemisphere.
If you've suffered through the DR for a while, then I hope you aren't too surprised at what you see. I've been editor of the Outstanding Investments newsletter for over seven years; I've written many articles about how ethnic and religious issues in the Middle East and North Africa (MENA) are leading to regional breakdown -- that "Oil Wars" scenario.
As a DR reader, you're far ahead of the crowd when it comes to understanding the big picture of MENA. Heck, you're likely far ahead of many politicians who pretend to make "policy" that affects things in MENA.
Right now, across the entire MENA region, Islamist propaganda is focused hard on erasing national boundaries set by colonial powers in 1916. That idea is becoming more and more popular among Arabs. Thus the post-war arrangement for the Middle East -- post-World Wars I and II -- is falling apart. When a century of history goes off the rails, we'll witness tumult. | Thus the post-war arrangement for the Middle East -- post-World Wars I and II -- is falling apart. When a century of history goes off the rails, we'll witness tumult. | In general, what's happening is not good for U.S. nor Western interests. Where are things heading? Frankly, it'll likely get much worse. I expect a regional war to occur in that part of the world; from the Nile River in the west, to the Indus in the East. It'll get ugly; no, make that very ugly.
Closer to home, terrible things will doubtless blow back. Many of those crazed Islamist fighters that you see in news photos and television video hold passports from the European Union, and even the U.S. and Canada. Prepare for when they come home. It'll get very, very ugly.
Of course, when it comes to tangible things like oil, oil prices and energy investing, the Iraq situation is bad, if you prize stability. I'll discuss this below.
Lest I be accused of total negativity, however, let's look at the Iraqi oil sector, which has done well over the past decade. Despite many oilfields, pipelines and assets located in the heart of a vicious war zone, Iraqi oil output has climbed steadily, as this chart shows. 
As recently as February 2014, Iraq oil output hit a 35-year high of over 3.5 million barrels per day.
"It looks optimistic for them [the Iraqis]," said one well-known European energy analyst, in a March interview with Bloomberg News. (I'll refrain from publicizing the man's name, to spare him further embarrassment.)
Iraq "should be on track for a good [spring]," continued this particular oil sage. "There's great [oil] export capacity available and that will help boost confidence among customers that they'll get their crude when they want it."
Then again... whoops. Just when things were starting to roll along, the proverbial wheels fell off the Iraq bus, and fast. About 10,000 mostly foreign jihadi fighters -- equivalent to an infantry division, technically -- conquered western Iraq, essentially erasing the border between Iraq and Syria.
Who are these guys? They seem to be a collection of fighters from all across the Middle East, as well as from Europe, Africa and even Asia and the Americas. They have money, training, organization, light weapons, Toyota pickup trucks and a flair for YouTube videos. Somebody is paying this tab. It's not a bunch of disaffected guerillas, living in caves up in the mountains.
By all accounts, foreign fighters cut through the half-million man Iraqi army and police force like a hot knife slicing butter. Crazed jihadis they might be; but give the Islamist troopers credit for combat effectiveness. Then again, they apparently executed many thousands of prisoners -- unadulterated war crimes -- and bragged about it. It's something of a first in the modern tale of military operations. I suspect that there's much more back-story to this story; we just don't know the details yet.
We do know that, right now, things are bad in Iraq. In a practical sense, here's a NASA LandSat image of the country's largest oil refinery, at Baiji, just northwest of Baghdad. 
What's wrong with this picture? If you say that refineries aren't normally supposed to be on fire and billowing smoke, then you're on the right track.
Normally -- when it's not exploding and burning -- Baiji refines 300,000 barrels per day of product, almost entirely for internal Iraq consumption. That and, of course, it's "over there" in Iraq. So what does it matter to you?
Well, if Baiji goes down, expect Iraq demand to tap international markets for gasoline, diesel, jet fuel, lubricants, etc. Thus does a burning refinery in Iraq reach out and touch global pricing levels. Everything is connected to everything else. | | | | | | | | | | | | Elite Banker Abandons Job for Radical New "Banking System"
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Is this what $2 trillion of money-blowing American nation-building looks like?
Is this what you get for 4,500 dead U.S. soldiers, and another 500 deceased allies?
And 50,000 wounded?
This is the return on investment for 250,000 dead Iraqis? Ugh. As I noted above, what a mess we see in Iraq.
Meanwhile, as let's look at oil prices. The world-class Brent crude quote is up strongly, of late. No surprise there, right? Then again, the current Brent price isn't all that bad compared to historical prices.
Yes, global oil prices are up with bad news from Iraq; but the price rise isn't a number that we haven't seen several times before, within the past three years or so. Somehow, the world has survived. So let's be cautious, here. Don't panic into rash investment behavior based on shocking news headlines.
At this point, let's back up and consider what an oil price-quote reflects. Yes, price reflects current oil "demand," to be sure. If you run a refinery, you need oil and you'll pay a certain price to obtain it.
Then again, oil prices reflect expectations of future availability. That is, if I can't buy a certain barrel of oil today, perhaps I'll defer and buy it tomorrow, or next week, or next month. Which gets me to North American fracking.
Despite all of the tight oil coming out of North American rocks due to fracking, I've noticed that many people just don't seem to be all that impressed. For example, several years ago, at the Offshore Technology Conference in Houston, I heard a talk by Alexei Miller, CEO of Russian energy giant Gazprom. | "Fracking is like going to a dinner party, and being served only hors d'oeuvres. They might be tasty; but I want to sink my teeth into a juicy steak." | During the question session, someone asked Mr. Miller about his views on fracking. He replied, according to my notes, that "Fracking is like going to a dinner party, and being served only hors d'oeuvres. They might be tasty; but I want to sink my teeth into a juicy steak."
That is, per Gazprom's Mr. Miller, fracking is a less-important form of major energy production than traditional drilling operations in hydrocarbon-bearing formations. All in all, Mr. Miller was disdainful of fracking. That was quite evident.
I saw the same sense of disdain towards fracking over the past few years, at the Platts Energy Conference in London. There, an "international" group of energy experts gathered, and essentially damned U.S. fracking with faint praise, when they weren't openly bad-mouthing it.
Think of everything that might be wrong with fracking, and the London critics focused on it during past Platts Conferences. Fracking is costly per well; energy-intensive; materials-intensive; water-intensive; high decline rates; drilling treadmill; only works in sweet spots; needs lots of gathering pipelines; leads to energy sprawl; political opposition and much more.
In essence, goes the critique, fracking is a temporary industrial process whose time will come and go quickly, as opposed to traditional oil drilling which has been around for 150 years and more. Many critics forecast that, by the 2020s, fracking will be passe. We'll live to see, right?
While the rest of the world has experienced declining oil output, the U.S. has shown remarkable improvement in oil production. Indeed, that 3 million barrel per day U.S. increase, of the past five years, is about equal to... well... the output of Iraq.
You're living through a new industrial revolution in hydrocarbon energy. If fracking (and horizontal drilling) had never come into the mainstream, U.S. energy output would likely be terminal. We'd be struggling and scraping through irreversible decline; and the situation in Iraq might look quite different -- with U.S. troops back on the transport planes, if you know what I mean. 
But with fracking? All that extra domestic oil gives the country -- and our politicians -- strategic flexibility in the short term, as well as into the medium and long term periods. Indeed, here's a chart (above) with one optimistic forecast of things to come from fracking.
As the chart illustrates, the "old" way of producing oil was in decline; and then came the fracking revolution. This new technology has brought the U.S. -- and the world, in a sense -- several decades more of hydrocarbon security.
Plus, consider that current fracking methodology recovers about 15% -- give or take -- of the oil within a tight rock formation. Only 15%; which means that perhaps there's tech coming down the line to, say, double that. Then 15% recovery becomes 30%, and maybe more. Indeed, there's no telling what shape that new oil production curve will take in the out-years. So be optimistic, on that front.
Yes, Iraq is a mess. It's falling apart. It's ironic that it's all happening during the summer of the 100th anniversary of the beginning of World War I, when the old Ottoman Empire fell apart. Lots of frozen conflicts are about to thaw out. | In Iraq, that 3.5 million barrels of oil per day of February will almost surely go away, and we may not see that number again for another 35 years, if ever in our lifetime. | In Iraq, that 3.5 million barrels of oil per day of February will almost surely go away, and we may not see that number again for another 35 years, if ever in our lifetime. With jihadis committing blatant war crimes, and truly egging regional players into a wartime psychology, things will get worse. Worse, worse, worse! Forget about getting better.
Here in the U.S. we'll continue working on energy security, with fracking. Sure, the critics will bellyache about drilling, well-pads, roads, pipelines and such. It'll get nasty, because the critics have -- in essence -- been wrong. Really, if we had deferred fracking, and the whole industry had declined to advance, we would not have the oil or gas, and we'd be screwed.
Looking ahead, I foresee more running room for North American oil companies. I hope you'll join us for the ride. Each day, we've been looking for 100 "Wildcatters" to capitalize on the U.S. shale boom that's sweeping the nation.
At stake is your chance to turn $1,500 into $40,000 in just a month. And we're going to show you how in about one weeks time. On June 29 you'll get an email from us -- provided you've signed up as one of the 100 readers we've been looking for. If you haven't gotten your Wildcatter badge yet, click here now.
Regards,
Byron King
for The Daily Reckoning
P.S. I figure that we'll have all 100 "Wildcatter" readers we're looking for by 3:00 PM today. Maybe 2:30pm. So if you click this link to our website and there are 100 signups already, you have my apologies. | | | | | | |  Byron King is the editor of Outstanding Investments, Byron King's Military-Tech Alert, and Real Wealth Trader. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration | | | | | | | BE SURE TO ADD dr@dailyreckoning.com to your address book.
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