Here we go again.
Just when tensions in the world’s energy tinderbox were beginning to subside and oil prices were beginning to drift slightly lower, all hell breaks loose once more.
The culprit is a fresh batch of issues spanning a variety of different nations within the Middle East. Protesters have stormed various U.S. Embassies and compounds across Yemen, Egypt and Libya. In Tehran, demonstrators gathered outside Switzerland embassy — which represents U.S. interests in Iran — and chanted “Death to Israel” and “Death to America.”
These eruptions across the Middle East — which echo the public reaction to a series of cartoons about the Prophet Muhammad in a Danish magazine back in 2005 — purportedly have been prompted by the low-budget film The Innocence of Islam. Posted on YouTube and translated into Arabic, the film portrays prophet Mohammad as a womanizer. For worshipers of Islam, any depiction of the prophet is considered sacrilegious, and the film is being used by militants to spur anti-American sentiments in the region.
Aside from the pending diplomatic and political crisis brewing — U.S. Ambassador to Libya, Christopher Stevens was killed during the violence there — an energy crisis also could be taking shape. Oil is now trading to near its highest level in almost three weeks amid concerns that these wide-spreading protests might threaten Middle East supplies (and thanks to upward pressure from the announcement of QE3 here in America).
By and large, if this continues, we could be a rough winter for energy consumers.
Back Up to $115
The latest round of violence in the Middle East has pushed Brent crude prices up to their highest levels in four months. Overall, Brent has rallied more than 30% since hitting an 18-month low of $88.49 in late June as geopolitical tensions with Iran began to fade. West Texas Intermediate has followed a similar path.
However, the rise shouldn’t come as too much of a shock to regular readers of InvestorPlace. While we all know that rising global demand has sent many E&P firms toward unconventional sources to keep supplies coming, and that these assets are expensive to tap, the geopolitical issues have been the major force driving prices.
And no bigger driver has been the Middle East.
While dysfunction in the Arab world has been a roughly steady constant, that violence has intensified in the past few years. Starting with December 2010’s revolutionary wave of protests, dubbed “The Arab Spring,” the Middle East has been a hotbed of activity. Various civilian uprisings have caused the ouster of several political regimens, including Libyan dictator Muammar Gaddafi and Egypt’s Hosni Mubarak. Likewise, protests across Oman, Kuwait, Bahrain and Iraq have threatened global oil supplies.
Then there have been the issues with a nuclear Iran. Tensions with Tehran continue to play out in the global energy markets, with the nation’s uranium-enrichment program at the center of the dispute.
The OPEC member continues to deny allegations that it’s trying to build nuclear weapons and says it produces uranium to fuel nuclear reactors. Because of concern that Iran is developing nuclear weapons that could strike Israel or other potentially sensitive targets, however, the U.S. and the European Union have imposed a variety of economic sanctions. But since Iran has been defiantly displaying its nuclear achievements, policymakers are considering even tougher measures.
This brings us to the latest round of tension stemming from the release of The Innocence of Islam.
As the film has now been translated into Arabic and spread across the Middle East, a new wave of intensifying violence has occurred, culminating with the Libyan embassy attack. Across Iraq, scores of people were killed in bombings and the vice president was sentenced to death for alleged murder. In Yemen, the defense minister survived an assassination attempt. And in Tunisia, extremists destroyed an establishment that serves alcohol.
Causing a Price Floor
Despite our burgeoning energy independence, the Middle East still is a major oil and natural gas supplier to the rest of the world. That’s a problem given the region’s continued political instability. So while any end to these latest tensions would allow prices to dip in the short term, there are plenty of reasons why they’re sure to move higher again down the road. Given the fact that the world’s energy markets are truly globally linked, the geopolitical issues in the Middle East will remain a price-boosting issue — most likely for years to come. Those higher prices for Brent crude will begin to trickle down to consumers, through what they pay at the pump or to heat their homes.
So can a low-budget movie really jolt energy prices so much? The answer is resounding yes, especially when it bothers the world’s energy tinderbox.
But that doesn’t mean we, as investors, can’t be prepared.
This is exactly the reason why investors need to have some exposure to the energy sector in their long-term portfolio. The equal-weighted SPDR S&P Oil & Gas Equipment & Services (NYSE:XES), the broad and cheap Vanguard Energy ETF (NYSE:VDE) and U.S.-focused iShares Dow Jones US Energy (NYSE:IYE) continue to be my favorite funds in this sector.
The three ETFs almost represent portfolio necessities at this point.
As of this writing, Aaron Levitt was long XES.