The commodities markets are running scared as images of unrest in Egypt dominate tv screens around the world. Just how high can black gold go? I asked that question to John Hofmeister former President and COE of U.S. Operations of Shell Oil and Founder and CEO of Citizens for Affordable Energy.
LL: How high do you anticipate the price of oil will go as tensions in Egypt escalate?
JH: It depends on whether there is going to be impact on the Suez Canal and the crude pipeline that runs through Egypt. The combination of the two is about 4 million barrels a day. And so, if you take 4 m barrels a day out of the global system. You are looking at a 20-30 dollar rise in the price of oil if that occurs. Right now there is a psychology of fear and so what's pushing the crude up is the psychology of the situation not the actual demising of supply. How else can you explain all-time high inventories at Cushing, with 92 barrel WTI? It says the psychology of the fear of disruption is happening right here, right now in the United States.
LL: Do you know if there are contingency plans in place with the oil companies?
JH: Not really, the first thing you would have to do is redirect transit and you would then redirect the transit around the horn of Africa but that's a six-thousand mile trip. So what you would rather do is just shut down the process. In other words, close down production or just put product in storage and just cease shipments pending other developments. But that takes oil out of the system right away and I think when it comes to Europe and Asia, you don't have a lot of inventory on hand and so you would see Brent skyrocket pretty quickly.
LL: Can you break down the price based on the different scenarios?
JH: If there is a shut down and it looks like it could be a few days or a few weeks you could see a 10 to 15 dollar kick. If it looks like its going to be months because the situation in Egypt is totally unsettled and the chaos is unmanageable and you might need an intervention to restore order, you could see oil going up 20, 30 dollars.
LL: Some fear the unrest will spread to other regions. Are you concerned?
JH: I don't see much threat at this point about it spreading to Kuwait, Iran, Iraq or Saudi Arabia. In the case of Iraq they have their own problems on their plate. In the case of Kuwait and Saudi Arabia, they take pretty good care of their people. Its a totally different economic situation in those countries. I think in Iran they kind of exhausted their democratic fever in their last election and they have been able to push through dramatic price increases for electricity and gasoline with no real reaction from the population.
LL: Do you think OPEC or Saudi Arabia will open up more oil production given the price jump?
JH: Some people might argue that a jump in price could prompt Saudi Arabia or OPEC to open up more oil production to offset higher price. I doubt this. The disruptions are unlikely to be lasting and there is enough anti-US sentiment in OPEC to let the US hang out there. No one in OPEC has any sympathy for US consumers, especially when the US Govt treats oil like last Sunday's newspapers.
LL: The Egyptian crisis is going on at a time where the Gulf of Mexico is a drilling ghost town.I interviewed Gary Luguette of Chevron on January 27th and he told me the industry in the Gulf is on "Life Support" what are you seeing?
JH: You have small companies on the Gulf that are on the edge. Months ago, Halliburton (HAL) cut two thousand vendors in one letter. I think the administration is being obstinate and the accountability for gasoline prices that will be paid by consumers is directly on their shoulders. There was no justification for shutting down the rigs in the gulf. The high price of gas is going to set back the American recovery.
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A Senior Talent Producer at CNBC, and author of "Thriving in the New Economy:Lessons from Today's Top Business Minds."