No Way Out

Excerpt from Powers Energy Investor, March 1st issue

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With the unrest continuing in the Middle East and northern Africa, we are rapidly heading towards a crossroads in the history of energy supplies. More specifically, the shutting in of approximately half of Libya’s oil production in the last week of February will mark the first of several meaningful supply disruptions that will push oil prices well north of current levels. The intractable problems of unemployment, rampant food inflation and religious hostilities that have caused the recent overthrow of Tunisia and Egypt and the imminent overthrow of Libya may soon manifest themselves into political unrest and potential regimes changes in both Kuwait and the kingpin of world oil exports, Saudi Arabia. There is simply no way out of the current strife for these two regimes.

Despite efforts to improve their public images through nominal reforms, the Kingdoms of Saudi Arabia and Kuwait are far from free and open societies. Though Kuwait, which produced 2.48 million barrels of oil per day (bop/d) in 2009 according to BP Statistical Review, is considered a constitutional monarchy since it has a legislature that is allowed to consult with the ruling family, the parliament has been consistently overruled and on occasion dissolved when the royal family gets tired of its calls for reform. The parliament has been dissolved five times since 1976 and as calls for reform have grown louder, parliament has been dissolved three times in the last five years. In December 2010, Kuwait revoked the broadcast license and banned Qatar-based Al Jazeera news network after the network decided to defy government orders and interview outspoken Parliament member Musallam Al Barrak. The expulsion of Al Jazeera sparked a violent confrontation between protesters in Kuwait City and police.

In addition to protests over freedom of the press, Kuwait has also seen protests of lack of basic rights to its Bidun or Bidoon people. These descendents of Bedouin tribes, estimated to number between 100,000 and 120,000, are not recognized as Kuwaiti citizens and have no rights since their ancestors did not register with the government in 1920 when the citizenship program was established and therefore are not considered Kuwaiti. Unlike Kuwaiti citizens, Bidoons receive no healthcare, education and have very limited employment opportunities. On February 18th approximately 1,000 Bidoons took to the streets of Jahra, a city 32 kilometers northwest of Kuwait City and clashed with police. According to news reports, more than 120 protesters were arrested and more than 30 were injured (Source: Eurasia Review). While the Kuwaiti government has made efforts to identify and grant citizenship to Biduns who can prove their lineage, the government appears to many in the Bidun community to be moving far too slowly.

Earlier this year the Kuwaiti government announced to all its citizens, an estimated at 1.1 million people, that they would receive $4,000 and free food rations in celebration of the country’s founding 50 years ago and the expulsion of Iraqi forces from its borders 20 years ago. The recent payment to its citizens will buy the government more time in power but with additional protests planned for March 8th and the entire Middle East and North Africa in turmoil; calls for a change in leadership in Kuwait are bound to grow louder.

The increasingly violent unrest in Bahrain, separated from Saudi Arabia by a 15-mile causeway, is very likely to spread into the Saudi Arabia in coming weeks and months. Bahrain, like Saudi Arabia, is a monarchy and despite largely cosmetic efforts at reform, the country allows its citizens few political freedoms. According to the New York Times, Bahrain’s King Hamad unsuccessfully tried to placate the country’s citizens by paying each family $2,650 in the days before the large-scale protests broke out. King Abdullah has already promised to spend $36 billion on an economic overhaul that will include unemployment benefits for jobless Saudis, housing support, funds to offset inflation and payments to overseas students. In addition, King Abdullah on February 27th, promised full-time jobs to Saudis working for the government on a contract or temporary basis. The press release issued by the government did not specify how many positions would be involved in this new scheme other than to say it would include positions deemed needed by the government. I find the granting of job security in Saudi Arabia to be a desperate attempt by the King to show that he is at least doing something to placate the masses. Similar to all other recent attempts by Middle Eastern autocrats to buy the peace, King Abdullah’s offerings are likely to be seen as too little too late. With neighboring Oman now experiencing violent protests, I doubt Saudi Arabia will be able to remain an island of tranquility much longer amongst the violent upheavals now underway on the Arabian Peninsula.

So what does this mean for investors? Growing unrest in Kuwait and the possibility of political turmoil in Saudi Arabia vastly increases the possibility of a violent spike in oil prices. While virtually all of the share prices of the companies in my Model Portfolio should benefit from increased turmoil in the Middle East, the oil-weighted member should see the most dramatic gains.

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© 2011 Powers Energy Investor, LLC. Information presented in this article was obtained from sources believed to be reliable but accuracy, completeness and opinions based on this information are not guaranteed. Under no circumstances is this an offer to sell or a solicitation to buy securities suggested herein. The editor may have an interest in the companies mentioned. All data and information and opinions expressed are subject to change without notice.

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