The Next Huge Oil Spike

Four months ago, Dan Dzombak, warned Fools to carefully watch relations between Iran and Saudi Arabia as both vie for power as the U.S. leaves Iraq. Yesterday, the world learned of a foiled Iranian government plot to kill the Saudi ambassador to the United States. Escalations such as this have me and many fellow Motley Fool writers convinced a portion of your portfolio should be in oil stocks as sky-high oil prices are not as far off as you may think.

The plot
Alleged members of the Iranian Quds Force, a branch of the Iranian Islamic Revolutionary Guard that "conducts sensitive covert operations abroad," tried to hire an undercover agent posing as a member of a Mexican drug cartel for $1.5 million to assassinate Adel Al-Jubeir, the Saudi Arabian ambassador to the United States. While U.S. officials said it was unclear how many people knew about the plan within Iranian President Mahmoud Ahmadinejad's government, if a plot like this had succeeded and cast the two Middle Eastern rivals into war, it would be disastrous for world oil markets.

Why it matters
People don't realize chaos and unrest have a huge effect on oil production. When large oil powers go through chaotic times, a significant amount of their oil-producing capabilities is lost for years. Often, these countries never return to the production levels they had before chaos started.

The most recent example is Libya. Production had averaged 1.6 million barrels per day but plummeted with the revolution in March:

Source: OPEC Monthly Oil Market Report, October 2011

Now that Libya is almost completely controlled by the new government, the country believes it can have full production back in 14 months. Wood Mackenzie predicts Libya can have production back in three years. However, both these estimates look optimistic compared to the historical record, which shows an average return time to full production of eight to 10 years.

The worrisome part of this example is the large price increase oil had after the relatively minor loss of production. The loss of 1.5 million barrels per day (total world supply was roughly 82 million barrels per day at the time) added an estimated $10 to $15 premium to Brent crude oil prices.

Saudi Arabia and Iran are much larger producers than Libya, and were they to go to war the effect on prices would likely be an order of magnitude more.

Source: OPEC Monthly Oil Market Report, October 2011

While I worry more about what will happen after the U.S. leaves Iraq at the end of the year, the Saudis are worried that Iran may try to cause unrest in the kingdom during the annual hajj pilgrimage to Mecca next month. CNN quoted a senior Saudi advisor who said, "We are on our toes. We expect the worst and we think Iranians are capable of using any person from any country to stir trouble during hajj season."

Foolish bottom line

A good way to protect your portfolio from rising oil prices is to invest in oil producers or oil service companies. To get you started on your search here are five Australian oil & gas service companies.

Source: S&P Capital IQ

With situations like this in mind, The Motley Fool has created a new special report, "The Best Stock For $100 Oil". If you're looking for Australian stocks to profit off the energy boom or an oil spike then you can download the report for free by clicking here.

Article originally written by Dan Dzombak and published at Fool.com. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.