The Situation You Need to Follow

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Last week uncovered a series of events that, while somewhat predictable, could also result in crude prices being blasted well above their current levels, thereby depressing our already teetering economy.

As most Fools with a thirst for energy know by now, I've become progressively more concerned about the potential for military fisticuffs between a pair of long-time Middle East adversaries. Indeed, in mid-May, claiming no special prescience, I called it "conceivable that a military confrontation could erupt later this year, with Iran and Saudi Arabia as the primary combatants, once most U.S. troops have departed from Iraq."

Threatening U.S. soil
Last week, shockingly was an announcement by U.S. authorities that they had earlier thwarted a plot hatched in Iran that was targeted at the assassination of the Saudi ambassador to Washington. Since such a scheme, had it succeeded, would have occurred on U.S. soil, it clearly could be considered more serious even than fomenting terroristic activities in Iran's home region.

While we can hope that this particular episode has been terminated, its existence is more than a little daunting, given Iran's increasingly brazen approach to international relations. Further, the current (and seemingly overly rapid) departure of U.S. forces in Iraq and the relative locations of Iran, Iraq, and Saudi Arabia make it difficult to assume that tranquility will become the order of the day in this crucial region.

Specifically, in the oil-rich Persian Gulf area, Iraq and its majority Shia Muslim population essentially sit in the center, separating Shia Iran to its east from the Suni Muslim-led Saudis on its western flank. As U.S. troops head for the country's exits, such that only a couple of thousand may be left within a few weeks, consortia of big oil companies -- BP (NYS: BP) and PetroChina (NTSE: PTR) in one, for instance, and ExxonMobil (NYS: XOM) and Royal Dutch Shell (NYSE: RDS- B) in another -- toil to replenish production from the country's big, but war-neglected, fields.

Thus far, the companies have been effective, although the production upside for the company remains tremendous. The 2.4 million barrels a day that constitute its current output is dwarfed by the (unrealistic) 12 million daily barrels that its leaders have advertised as an avowed objective in just over five years. Nevertheless, the companies named above, along with other group members and their services providers, such as Schlumberger (NYS: SLB) , Halliburton (NYS: HAL) , and Weatherford (NYS: WFT) , should be able to ratchet up the current number several fold within the next few years.

Ganging up?
Indeed, the question that was intensified by last week's disclosures involves the willingness of Iran's leaders to behave themselves and remain out of Iraq's business once protective U.S. forces have been removed. Or, alternatively, is Iran more likely to force itself upon its Iraqi Shia brethren for an alliance capable of seriously disrupting Saudi Arabia?

The response is meaningful, especially when you consider that the three countries produce more than half of OPEC's crude output and nearly 20% of the world's total demand. Therefore, if Iran adopts the disruptive approach, it's impossible to predict the resulting leap in crude prices except to note that today's mid-$80s level would be paltry by comparison.

But there continues to be some skepticism about whether knowledge of the diabolical plot reached all the way to the top in Iran. To that lingering question President Obama said late last week, "Even if at the highest levels there was not detailed operational knowledge, there has to be accountability with respect to anybody in the Iranian government engaging in this kind of activity."

Foolish bottom line
If so, where this dust-up eventually leads may depend as much on Obama himself as on, for instance, Iran's Supreme Leader Ali Khamenei or its president, Mahmoud Ahmadinejad. Indeed, as Reuel Marc Gerecht, a former Central Intelligence Agency officer declared in a Wall Street Journal piece last week, "The White House needs to respond militarily to this outrage. If we don't, we are asking for it."

But even with Iran's overt truculence, I'm betting that the likelihood of our unleashing a military response against that country is as likely as Thanksgiving popping up in Halloween's slot later this month. While you may have a propensity for such other sectors as health care, technology, etc., Foolish investing mustn't turn a blind eye to the various facets of energy.

Indeed, you must remain abreast of the unfolding of dicey geopolitics in the Middle East. And beyond that I strongly suggest that you add to your version of My Watchlist a basket of energy names, perhaps beginning with Exxon and including your picks from, say, oilfield services and the domestic producers. 

At the time this article was published We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Fool contributorDavid Lee Smithdoesn't own shares in any of the companies named in this article. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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