Why We Can't Depend on Russian Oil

Source: MSN Money - From Russia, with love: $60 oil - Jubak's Journal.

Is $60-a-barrel oil in our future? In our near future? Yep. It's a sure thing.

And once the oil market has cracked that psychological barrier, you should expect it to run higher before taking another breather.

You can thank Vladimir Putin and those apparatchiks who run Russia's economy for the run-up. They've just about guaranteed that Russia's oil industry won't get the foreign capital it needs to expand the number of barrels the country pumps annually.

Bad timing for consumers
The slowing growth prospects for Russian oil production come at a particularly bad time for global energy consumers. China's economy grew faster in the first quarter of 2005, at a 9.5% annual rate, than most economists had expected. Projections had growth somewhere below 9%. That has led some oil economists to bump up their predictions of growth in global oil consumption for 2005 to near 2.5% from earlier projections of 1.5%. With little new production capacity scheduled to come on line in the short term and with OPEC countries already pumping near capacity, every bump up in consumption counts. All this is likely to keep the upward pressure on oil prices going through 2005.

For investors, it's not just the upward direction of oil prices that counts; it's also a stark reminder to everyone who trades and buys oil of the political risk to oil supplies. A huge percentage of the world's oil reserves lie in not-especially stable countries: Russia, Nigeria, Iraq, Iran, Venezuela, Indonesia, and, to my way of thinking, Saudi Arabia. A coup here, a government takeover there and you've got not just a spike in oil prices but a serious disruption in supply that will make the energy in stable regions all the more valuable.

And that's where I'd put my short- and longer-term energy bets now -- into the shares of companies that produce a significant amount of their energy from stable regions such as the United States and into the shares of companies that sell the equipment and services needed to exact energy in those regions.