TIME energy

Obama Approves Sonic Cannons to Map Atlantic for Offshore Oil and Gas

Offshore drilling in the Atlantic is up for debate
The Atlantic offshore territory has been off limits to U.S. oil drilling, but that could change Brasil2 via Getty Images

Over environmental objections, the Obama Administration moves forward with exploration that could yield new domestic oil and gas sources

The Obama administration reopened part of the Eastern seaboard Friday to offshore oil and gas exploration, promising to boost job creation in the energy sector while at the same time fueling the fears of environmental groups.

The U.S. Bureau of Ocean Energy Management (BOEM) estimates that 4.72 billion barrels of recoverable oil and 37.51 trillion cubic feet of recoverable natural gas lies beneath the coast from Florida to Maine. The recent decision allows exploration from Florida to Delaware and could create thousands of new jobs supporting expanded energy infrastructure along the East Coast.

“Offshore energy exploration and production in the Atlantic could bring new jobs and higher revenues to states and local communities, while adding to our country’s capabilities as an energy superpower,” American Petroleum Institute upstream director Erik Milito said in a statement.

Environmentalists worry about damage to shorelines, and to the tourist industry. They also worry about the safety of ocean wildlife. The exploration will initially be conducted via seismic surveys that use sonic cannons to locate oil and gas deposits beneath the ocean floor. The cannons emit sound waves louder than a jet engine every ten seconds for weeks at a time.

“We’re definitely concerned,” Hamilton Davis, energy and climate change director for the South Carolina Coastal Conservation League, told TIME. “The exploration activities lead in the direction of actual development of oil and gas, and from our perspective as a coastal organization that worries about our environmental ecological landscape as well as our [tourism] economy, the oil and gas industry certainly doesn’t seem to fit into that equation. Just the impacts from exploration activities on marine wildlife I think would give most people pause… You’re talking about hundreds of thousands of animals that will be negatively impacted as a consequence of these activities.”

BOEM said it approved the seismic surveys with the environment in mind. “After thoroughly reviewing the analysis, coordinating with Federal agencies and considering extensive public input, the bureau has identified a path forward that addresses the need to update the nearly four-decade-old data in the region while protecting marine life and cultural sites,” said Acting BOEM Director Walter D. Cruickshank in a statement.

Sonic cannons are already used in the western Gulf of Mexico and off the coast of Alaska, but many constituents and elected officials in the newly opened East Coast territory have expressed their concerns about the testing and eventual drilling. Congressional officials from Florida, including Sen. Bill Nelson, D-Orlando, and Rep. Kathy Castor, D-Tampa, signed a letter to President Obama opposing the decision.

“Expanding unnecessary drilling offshore simply puts too much at risk. Florida has more coastline than any other state in the continental United States and its beaches and marine resources support the local economy across the state,” the letter states.

The area to be mapped is in federal waters, not under the jurisdiction of state law. Energy companies will apply for drilling leases in 2018, when current congressional limits expire.

 

TIME energy

White House Tightens Oil Train Safety Regulations

Oil Trains Accidents
a BNSF Railway train hauls crude oil near Wolf Point, Montana on Nov. 6, 2013. Matthew Brown—AP

After a spate of train derailments, the Obama administration issued new rules on an increasingly popular way to move crude in the U.S.

Updated at 3:53 p.m.

Freight trains that haul an increasingly large amount of oil across the United States will have to improve safety mechanisms under new regulations proposed by the Obama administration Wednesday.

The new rules include lower speed limits, new brake requirements, tougher regulations on the sturdiness of oil tank construction and a plan for phasing out some older oil tank cars.

As a result of the rapid increase in oil production in North America in recent years, a growing volume of crude is being moved from well-head to refinery via freight trains—an increase of 423 percent between 2011 and 2012, according to the Department of Transportation. In tandem with that sharp uptick, there has been a spate of train accidents involving spilled crude oil, up from none in 2010 to five in 2013 and five by February this year, before a train carrying crude derailed in April in downtown Lynchburg, Virginia, temporarily setting on fire to a river that passes by the town’s population of 77,000.

The fact that train accidents overall have been in sharp decline in the last decade speaks to the tremendous increase in the amount of crude oil being moved around the country by rail.

Environmentalist groups have been pushing for tighter safety rules on freight trains carrying crude oil, which often pass through or near residential communities. A particularly devastating train accident last year in a town in Quebec left more than 40 dead and dozens of buildings destroyed.

Among the initiatives the DOT proposed Wednesday is a plan to address concerns that crude oil drilled out of the Bakken Shale formation in North Dakota, today one of the most productive oil fields in the world, is a particularly dangerous form of crude. “It has become general public knowledge that Bakken crude is proving particularly explosive,” said Anthony Swift, a staff attorney with the Natural Resources Defense Council.

In its response to the DOT proposal, the American Petroleum Institute, a trade group, rejected the notion that Bakken crude is especially dangerous. “The best science and data do not support recent speculation that crude oil from the Bakken presents greater than normal transportation risks,” said API President Jack Gerard.

MONEY stocks

What Airline Stocks Tell Us About the Rest of the Market

airplane window view above the clouds
Getty Images

A century-old market timing strategy known as Dow Theory views the rally in airline stocks as a bullish sign, but investors need to approach the transportation sector with skepticism.

High oil prices. Fee-weary passengers. A global economy that’s still not firing on all cylinders. And geopolitical crises forcing carriers to re-route their flights.

Given these recent developments, you’d think that airlines stocks would be struggling of late.

But you’d be wrong. Airline stocks have been among the best performing groups in the U.S. stock market recently, with the Dow Jones U.S. airline index up nearly 75% over the past 12 months.

^DJUSAR Chart

^DJUSAR data by YCharts

In the short run, this trend is likely to continue, especially if airlines keep posting strong results. On Tuesday, Delta Airlines reported that revenue grew more than 9% in the recently ended quarter, versus the same period last year. The carrier also reported earnings per share of $1.04, versus consensus forecasts of around $1.02 a share.

But what of the long run?

One of the most enduring market-timing strategies on Wall Street would seem to point to blue skies ahead—and not just for airline and transportation stocks.

Dow Theory, the brainchild of Charles Dow, the founder of The Wall Street Journal, is one of the oldest technical indicators that’s still used by investors to gauge future stock market movements. Dow Theory has many technical layers, but in broad strokes the strategy seeks to verify trends in the Dow Jones Industrial Average by looking at the Dow Jones Transportation Average.

The idea is that stocks tend to rise when the economy is humming. And to tell if that’s the case, you need to see not only that factories are on the upswing (as measured by the Dow Industrials), but that transportation companies that are paid to move manufactured goods out of those factories are also on a roll. Hence the need to study the Dow Transports.

Recently, the airlines haven’t been the only transports rallying. Shares of railroads and trucking-related companies have also been on the rise:

^DJUSAR Chart

^DJUSAR data by YCharts

This explains why both the Dow Industrials and Dow Transports are at or really close to their all-time highs:

^DJT Chart

^DJT data by YCharts

Still, it’s important to understand that transport stocks have been soaring for more than five years now, as investors have been anticipating an improved economy ever since 2009.

The result is the bull market in transportation is getting long in the tooth. Meanwhile, valuations for many of these companies, including the airlines, are soaring.

As you can see below, while the broad market trades at a price/earnings ratio of around 17 or 18, many airline stocks — such as Southwest , United Continental , JetBlue , and Spirit — trade at significantly higher P/E ratios.

LUV PE Ratio (TTM) Chart

LUV PE Ratio (TTM) data by YCharts

The bottom line: This may be a time when it makes more sense to look at the fundamentals of each individual company, rather than at the technical trends for the airlines or transports as a whole.

TIME Iran

A Side Effect of Iranian Sanctions: Tehran’s Bad Air

An overview of Tehran, July 7.
An overview of Tehran on July 7, 2014 Kiana Hayeri for TIME

Air pollution has decreased significantly since sanctions were temporarily lifted in January. As Iran and the U.S. attempt to hammer out a comprehensive nuclear deal before the July 20 deadline, the capital city’s newly cleaner air hangs in the balance 

When the U.S., the U.N. and Europe implemented, in 2010, one of the harshest sanctions regimes ever seen globally to curb Iran’s suspected development of a nuclear-weapons program, it was widely expected that the country would soon fall to its knees. Instead, Iran absorbed the blow, and though weakened, has managed to keep its economy afloat.

The sanctions all but stopped international financial transactions, limited military purchases, reduced the import and export of petroleum products and significantly curtailed trade — but you wouldn’t know it by walking the bustling streets of Iran’s capital of Tehran. According to economist Saeed Laylaz, Iran imported $3 billion worth of European luxury cars last year, triple the number before sanctions. Grocery stores are packed with all kinds of American products: from Coca-Cola to Snickers candy bars to Duracell batteries, while electronics shops even in small towns proudly display the full range of Dell, Hewlett-Packard and Apple products — even the iPhone 5S. The sanctions didn’t hurt Iran, say Iranians; they merely amplified an economic crisis wrought by government mismanagement in the preceding years.

About the only place where the impact of sanctions is visible is in the skies above Tehran. Iran may have the fourth largest proven petroleum reserve in the world, but it refines little of its own product, depending instead on imports of fuel from Europe. Sanctions cut those commodities off, sharply reducing supplies of gasoline. In order to keep Iran’s 26.3 million cars, trucks and motorcycles on the road, government officials were forced to convert petrochemical factories into ad hoc refineries, an expensive and inefficient process that produces a low-grade fuel choked with pollutants.

The results were devastating. Already home to some of the world’s most polluted cities, Iran saw a dramatic increase in the air pollution that contribute most directly to ill health, according to a worldwide World Health Organization assessment released in 2013. It is impossible to definitively link the impact of sanctions to the rising rates of childhood asthma cases and lung disease documented by Iran’s Health Ministry over the past four years — the concurrent increase in car ownership may also play a role. But when some sanctions, including those on the import of gasoline, were lifted in January under an interim agreement that proffered relief in exchange for substantial negotiations over the scope of Iran’s nuclear program, the impact was visible.

In June 2013, the pollution in Tehran was so bad that the mountains surrounding the capital could not even be made out from the 13th floor of a hotel popular with journalists in the city center. A year later, however, the last vestiges of winter snow could be spotted high on the mountains to the north of the city. “Sanctions significantly contributed to pollution, and particularly the kinds of pollution that are damaging to health,” says Rocky Ansari, an economist and sanctions expert at Cyrus Omron International, a firm that advises international companies on investing in Iran. Even before the sanctions were lifted, he says, the government was working on improving refining capacity in the country, but the international decision to clear the way for increased imports of refined fuel was a huge boost. “Now that hardly any petrol from petrochemical factories is being used, the pollution has reduced, and already people can breathe better air.”

That may be the case, but many Iranians are still holding their breath. The interim agreement ends on July 20, and a comprehensive deal that limits Iran’s ability to produce nuclear weapons in exchange for a permanent lifting of sanctions is still in doubt. Iran says its nuclear program is purely for peaceful purposes, but a long history of subterfuge when it comes to international inspections has raised doubts about the country’s true intentions. The U.S. wants to see a sharp reduction in Iran’s ability to enrich nuclear fuel to weapons grade; Iran says it will not submit to overly onerous limits on its nuclear energy program.

The temporary agreement can be extended by up to six months, a point raised by French Foreign Minister Laurent Fabius on the sideline of talks in Vienna on July 13. “If we can reach a deal by July 20, bravo, if it’s serious,” he told reporters, according to Reuters. “If we can’t, there are two possibilities. One, we either extend … or we will have to say that unfortunately there is no prospect for a deal.” Should the talks fail, as with several previous attempts to strike a deal, the U.S. is likely to lead the call for even tougher sanctions, risking more conflict in a region already in turmoil — and further darkening the skies above Tehran.

— With reporting by Kay Armin Serjoie / Tehran

TIME Environment

A Year After a Deadly Disaster, Fears Grow About the Danger of Crude Oil Shipped By Rail

The U.S. is producing more oil than it has in decades—and much of that oil is being transported by railroads that travel through crowded cities

+ READ ARTICLE

When 21-year-old mother Kahdejah Johnson was told two years ago that she’d secured a spot at the Ezra Prentice Homes, a quiet housing project in Albany, she felt confident she’d found a stable home to raise her newborn son. With its manicured lawns and tidy beige row houses, the Ezra Prentice Homes are a far cry from the crumbling housing projects of large cities. “When people come into town they’re like ‘These are your projects? These are condos!’” says Johnson.

But today, Johnson is losing sleep over how close her house is to railroad tracks congested, day and night, with tanker cars carrying crude oil, visible just outside her bedroom window. The fear of an accident is so great that Johnson has taken to evacuating her apartment some nights, to spend the night at her mother’s home, further from the tracks. “Now I’m afraid to be in my own home,” she says. “Do you know how fast we could die here?”

Albany is one of a growing number of cities where residents like Johnson fear the devastating consequences of accidents involving railcars filled with crude oil. They have reason to fear—on July 6, 2013, a train carrying oil derailed in the Canadian town of Lac-Megantic, causing an explosion that destroyed more than 30 buildings and killed more than 40 people. This past Sunday, Johnson and other Albany residents held a vigil to commemorate the Lac-Megantic derailment—and draw attention to the growing opposition to transporting crude oil by rail

“Jo-Annie Lapointe, Melissa Roy, Maxime Dubois, Joanie Turmel,” participants in the vigil intoned into a microphone, naming Lac-Megantic residents killed in the explosions. In a line, they held portraits of each of the deceased and read their names, pinning the pictures to a black metal fence. “You may not say that they lived right next door to you, but they were your neighbors,” said Pastor McKinley Johnson, who officiated part of the ceremony. “You may not say that you understand all the language, but they’re your sister and your brother.”

As in Lac-Megantic, oil tankers containing highly flammable crude oil from the Bakken oil fields in North Dakota and Montana roll right through their residential areas. Rows of train-cars filled with crude oil often stand idle for hours on the tracks that hug the curves of the housing project, so tightly only 15 feet at most separate the two in some areas. “Once I found out that these are the same tanks that were in Canada, I was like ‘Oh my God, someone pray for us, We’re in danger’,” Johnson said.

This fear is a consequence of the unconventional oil boom in states like North Dakota, where for the last several years producers have been using hydrofracking techniques to pump oil previously locked in underground shale rock. The new oil fields have helped America’s oil production rise to a 28-year high. But that crude oil has to get to refineries, most of which are located in coastal cities—and much of that oil is moving by rail. Nationally, transport of crude oil by train has jumped 45-fold between 2008 and 2013, according to a recent Congressional Research Service report.

While the U.S. has yet to experience a rail catastrophe on the scale of Lac-Megantic, the country has had its share of close calls. The National Transportation Safety Board counts five “significant accidents” of trains containing crude oil in the United States in the past year alone. The latest, in Lynchburg, Virginia, saw a train carrying crude Bakken oil derail and burst into flames in the town’s center this April, producing black plumes of smoke and billows of flames taller than buildings nearby. The crude oil also spilled into the James River, though one was injured.

The worrying trend has opened a new front to the national environmental debate. Some 40 cities and towns across the country scheduled similar events to mark Lac-Megantic’s one-year anniversary. Many of the rallies will take place in the usual hotbeds of environmental activism —in places like Seattle and Portland—but also in blue-collar tows like Philadelphia and Detroit, where activists will voice demands ranging from a moratorium on oil-trains traffic to increased safety controls.

But the problem has also presented environmentalists with a conundrum. One of the factors behind the rapid rise of railroad shipment of crude oil has been the shortage of oil pipelines, which could move greater quantities of oil from landlocked states to coastal refineries. Front and center to this debate is the multi-billion dollar Keystone XL pipeline project, which would connect the oil sands of western Canada to the Gulf Coast, but which President Obama has yet to approve—in part because of objections raised by environmentalists, who fear the potential for a spill.

Fewer pipelines has meant more oil moved via rail. “If Keystone had been built we wouldn’t be moving nearly the volume of oil that we’re moving by rail,” said Charles Ebinger, the director of the Energy Security Initiative at the Brookings Institution.

That has exposed the Keystone’s opponents to criticism that by standing in the way of pipeline projects, they are raising the risk of rail accidents. Though hazardous material like crude oil makes its way safely via rail 99.998 percent of the time, according to the Association of American Railroads, a plethora of research suggests that pipelines result in fewer spillage incidents, personal injuries and fatalities than rail. That includes an authoritative environmental review the State Department released last January, which concluded that “there is… a greater potential for injuries and fatalities associated with rail transport relative to pipelines.”

Still, environmentalists like Ethan Buckner of ForestEthics, the group coordinating the string of events to commemorate the Lac-Megantic tragedy, reject that dichotomy. “The industry is trying to present Americans with a false choice between pipelines and rails,” he says. “We want to choose clean energy.”

Back in Albany, the vigil was deemed a success, drawing a crowd of about a hundred. But Kahdejah Johnson wasn’t among them. Why not? Her fear, she said, got the best of her. “Honestly, I don’t really hang by my house,” she said. “I don’t like to be in that area if I don’t have to be there.” She is now on a waiting list to be transferred to another development—something she’s told could take up to four years. In the meantime, the trains will keep rolling.

TIME Iraq

In the Midst of Iraq’s Chaos, the Kurds Inch Towards Independence

Kurdish protesters
Iraqi Kurdish protesters display the flag of the autonomous Kurdistan region on July 3, 2014. Safin Hamed—/AFP/Getty Images

Militants from ISIS are threatening Iraq's capital of Baghdad, but in autonomous Kurdistan, things have never been better

As the Iraqi army continues to battle Sunni militants for control of its territory―with forces from the Islamic State not far outside the capital of Baghdad―Kurdish President Masoud Barzani is sitting comfortably in quiet Erbil. After over a century of demands for independence, Kurds may be closer than to securing their statehood. “In Kurdistan we have a government that is functioning, a parliament that is meeting and professional, dedicated Peshmerga forces,” says Falah Mustafa Bakir who heads the Kurdistan Regional Government’s (KRG) Department of Foreign Relations. “In Iraq you have none of that.”

With the autonomy granted to the KRG under the Iraqi constitution, Kurds have managed an entity that looks more like a functional state than many long-established nations in the region. They secure their own borders and are sidestepping Baghdad to exporting their own oil. Their independent police force even monitors speeders with traffic cameras.

In central Erbil, the Kurdish de-facto capital, Hoshang Assad wheels his car through the streets. The 26-year-old taxi driver explains how Kurds have all the trappings of a modern nation-state. “We have our own language, our own culture and our own land,” he says. “We have a good economy now, we have oil, we have everything we need to make our state.”

But while Kurds believe they are a nation now in everything but name, those outside its borders are less sanguine about the possibility of true independence. Assad’s car seats are covered with massive American flags and like many Kurds he recite praise for the US, the Kurds oldest, and at times only, ally. Washington, though, hasn’t exactly been a cheerleader of Kurdish independence. “In 2003 the U.S. wanted the Kurds to give up federalism and give up their Peshmerga forces. The Kurds refused,” said Gareth Stansfield, a professor of Middle East politics at the University of Exeter in Britain. “Imagine what Erbil would look like today if they had given up the Peshmerga…ISIS would be flying its black flag in Erbil.”

In the past three weeks, the Peshmerga have fortified the Kurdish frontiers and moved into contested areas like oil-rich Kirkuk, even as Iraq’s national army fled invading fighters from ISIS. And as the black flags of ISIS stake claim to neighboring towns, the sun-crested Kurdish flag still flies above the secured streets of Kurdistan. Since 1945, when the Kurds briefly had an independent state, this flag has represented Kurdish aspirations for statehood. But after years of fighting alongside U.S. troops, implementing U.S.-favored free market economics and now allowing hundreds of thousands of displaced Iraqis and Syrian refugees to take shelter in their territory, Kurds may deserve a sportsmanship trophy―but it may not earn a seat at the United Nations. “The U.S. has invested so much time and treasure into the idea of Iraq as we know it,” said Stansfield. “The collapse of Iraq will be seen as a waste of American life and money.”

But Bakir, who was with the Kurdish delegation in Washington this week, believes that the latest crises may cause the U.S. to change its position. “The U.S. has seen the difference between Erbil and Baghdad,” said Bakir. He says the Kurds are now on a two-track approach, still willing to compromise with the Iraqi government in Baghdad―but also ready to make their moves toward independence. “Baghdad always promises Kurds the world when Baghdad is weak,” says Stansfield. “And then as soon as Baghdad is strong enough to re-impose its authority over the Kurds then it comes back with its engines.”

The idea of splitting up the country, whose borders were drawn by colonial authorities Britain and France a century ago and defined by the Sykes-Picot Agreement, is uncomfortable for many―particularly neighboring states like Turkey with large Kurdish minorities of their own, pushed up against the aspirational state’s borders.

“Kurdish national aspirations will not stop in Zakho,” says Hosham Dawod, an Erbil-based researcher for the French National Center for Scientific Research, referring to the Kurdish town that sits on the Turkish border. “They will cross the border. Right now this Sykes-Picot map is looking very weak.”

And while Iraqi Kurdish leaders caution that their national aspirations are confined to land within Iraq’s current borders, there is worry among regional and international powers that Kurdish independence could have a domino effect. Iran and Syria both have large Kurdish populations. Amid the chaos in Syria, Kurds have asserted a degree of control in their villages, and Iran may fear all this will inspire its own Kurdish minority. Stansfield says Iran also benefits from having a weak Shia-led state next door.

But with Iraq in turmoil it is possible that Turkey will get onboard, preferring a pragmatic Kurdish state to a caliphate on its southern border. Already, the Turks have helped the Kurds export oil through their territory and signed a 50-year gas deal with the KRG―acts frowned upon by Baghdad. Currently, the Kurds are exporting around 100,000 barrels per day, but that’s not enough to support a new state of over 6 million people. Israel has become a natural market for this oil, but it’s not clear who else will buy all those barrels, as many countries fear buying from the Kurds would cause Baghdad to cut off its much larger exports.

And while the Kurds have created relative autonomy and prosperity in their enclave, their finances are less secure. Baghdad has withheld millions of dollars in transfer payments to Erbil since January over oil the sales and Kurdish civil servants are still waiting for paychecks the KRG doesn’t have the money to write. Nonetheless, jumping off a sinking Iraq may offer a better path to prosperity than staying within its borders. “The political landscape has changed and the balance of power has changed,” said Bakir. “There is a new reality and that requires a new policy and a new approach.”

TIME energy

Oil Prices Soar as Iraq Tumbles Into Chaos

The harrowing situation in Iraq meant gains for some U.S. investors in the energy market

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As the conflict in Iraq escalates, oil prices are skyrocketing — the benchmark price of Brent Crude oil stood at more than $115 a barrel Wednesday, approaching a nine-month high according to Bloomberg. And some investors are maximizing on short-term business opportunities couched within the rising costs.

Stocks at Chevron, BP and ExxonMobil have reached record highs, in part because higher energy prices translate to larger revenue for producers, and because growing tensions abroad have made U.S.-based production companies more appealing, CNN reports.

So for anyone invested in those oil companies, the turmoil in the Middle East could mean financial success. However, energy experts warn that investors should keep an eye on the potential boomerang effect that often occurs after an energy scare.

MONEY stocks

Iraq Crisis Fuels Short-Term Boom for Energy Stocks

Investors, though, must beware of the potential boomerang effect that almost always occurs following an energy scare.

Despite the incendiary conflict in Iraq that last week sent the benchmark price of Brent crude oil to more than $115 a barrel, U.S. stock markets largely shrugged off the oil threat.

In fact, a new energy crisis in the Middle East presents something of an opportunity for investors — albeit a fragile, short-term one.

While energy production has become much more geographically diverse, lessening the severity of a Mideast production shortfall, Iraq is still OPEC’s second-largest producer. And as is the case during any threat to global oil production, the share prices of oil companies and the funds that invest in them soar on bad news, which is what happened last week.

Owing to greater demand for oil and geopolitical tensions, ExxonMobil , the largest energy company by market valuation, climbed 10.5% over the three months through June 20, compared to a 5.3% gain in the S&P 500 Index . BP was up nearly 15% over the three months ended June 20.

The last three months are important because they include a spate of good reports on economic growth in Europe and the U.S. and a run-up to the political strife in the Middle East. These events, and growing demand from developing countries such as China and India, have pressured oil prices upward.

The Vanguard Energy ETF , which holds a broad portfolio of oil and gas exploration, refining and pipeline companies, gained 16% in the quarter through June 20. It holds companies like ExxonMobil, Chevron and Schlumberger , and nearly all its holdings are based in North America. It’s up about 16% in the three months through June 20.

For a fund that’s not dominated by the most popular energy stocks, consider the Guggenheim S&P 500 Equal Weight Energy ETF , which holds a global portfolio of energy producers in roughly equal proportions.

The Guggenheim portfolio places more emphasis on smaller, lesser-known companies like Newfield Exploration Co. , Anadarko Petroleum and Nabors Industries . The fund is up nearly 16% for the three months through June 20. Independent companies like these may have more drilling activities in the areas where shale oil and gas are being discovered throughout North America.

Energy Shock Boomerang

Over a short period of time, it makes sense to hold energy stocks as a defense against rising oil prices. After all, companies make profits on price surges.

But on the consumer level, higher petroleum prices can act as a damaging boomerang.

When prices soar beyond a certain level, it brakes economic activity across the board. Higher fuel prices force people to drive less and stay away from stores, raise prices for everything from farm goods to plastics, and act as a tax on economic growth.

During the last draconian oil-price run-up in 2008 — when crude oil prices topped $140 a barrel — the combination of an energy shock, a banking meltdown and massive unemployment from Athens to San Francisco created a recession in Europe and North America. Towards the end of that year, energy prices bludgeoned an already-hobbled economic situation and the Vanguard Energy fund lost nearly 40% of its value, slightly more than the S&P 500 Index.

Looking ahead, what may mitigate any traumas in terms of oil prices will be growing U.S. oil and gas production, particularly in regions where “fracking” technology has liberated more hydrocarbons from shale formations from the Appalachians to North Dakota.

Production in the U.S. was up a record 1.1 million barrels per day last year, offsetting declines in global output from Libya, Nigeria and Iraq — all due to political strife.

“The huge investments seen in the U.S. have been encouraged and enabled by a favorable policy regime,” BP economist Christof Ruhl told Reuters. “And this has resulted in the U.S. delivering the world’s largest increase in oil production last year. Indeed, the U.S. increase … was one of the biggest annual oil production increases the world has ever seen.”

Across the globe, the future for energy stocks is positive long term. Consumers in China, India and Africa are buying petroleum-hungry vehicles. And until less-costly alternatives present themselves, fossil fuels will power the engines of these developing economies.

TIME energy

U.S. Oil Could Rescue Iraq

A satellite image shows smoke rising from the Baiji refinery near Tikrit, Iraq, June 18.
A satellite image shows smoke rising from the Baiji refinery near Tikrit, Iraq, June 18. U.S. Geological Survey/Reuters

If civil war engulfs all of Iraq, oil prices are likely to skyrocket. But U.S. exports could change the game

Even though the conflict in Iraq still rages, with forces from the Islamic State of Iraq and Greater Syria (ISIS) just an hour outside of Baghdad while the Syrian military is reportedly bombing the insurgents, global oil markets have mostly calmed. Prices for Brent crude on June 26 had fallen below $114 a barrel, and have dropped more than 1% since hitting a nine-month high on June 19. The violence in Iraq’s north and west—including fighting around the country’s largest refinery in Baiji—hasn’t yet seriously affected oil production in the Shiite dominated south. Iraq’s Oil Minister Abdul Kareem al-Luaibi even promised in an interview with Bloomberg that the nation’s oil exports—which have averaged more than 2.5 million barrels a day—will actually accelerate next month. “Oil exports will witness a big increase, as recent events didn’t reflect negatively on Iraq’s crude output and exports,” al-Luaibi said. “International oil companies are working normally in Iraq.”

That doesn’t seem to be quite true, though—international oil majors like BP and ExxonMobil have already evacuated some of their foreign workers from Iraq. And if things do get worse, oil markets might not react so calmly. A recent report from the nonprofit Securing America’s Future Energy found that the loss of just a third of Iraq’s oil output could be enough to push global oil prices up as much as $40 per barrel. Even if production from Iraq stays steady, political turmoil in countries like Libya and Nigeria have helped remove some 3.5 million barrels a day of oil production capacity. That doesn’t leave much room for more trouble in Iraq, the world’s third-largest exporter of crude oil. And with Iraq projected to be the biggest single contributor to new oil production over the coming decades—at least before the ISIS insurgency revved up—what happens in the country will matter at the pumps for a very long time.

But it’s not so easy to predict the future of energy and oil. Case in point: the fracking revolution in the U.S., which has unlocked vast amounts of previously inaccessible crude, and which few experts saw coming. Between 2008 and 2013, U.S. oil production increased by 2.4 million barrels a day, to more than 7.4 million. And the growth hasn’t stopped—production hit 8.3 million barrels a day in April. Most of the new global oil production brought online over the past few years has come from the U.S. While the U.S. doesn’t export raw crude—aside from a few small exceptions, U.S. oil exports have been banned since 1975—more oil at home means fewer imports, which in turns leaves more oil on the global market for everyone else. Take away the fracking revolution, and global oil markets wouldn’t have been able to so easily shrug off the violence in Iraq.

In the years to come, the U.S. could play an even bigger role. As the Wall Street Journal and Reuters reported earlier this week, the Obama Administration has begun taking steps towards allowing U.S. crude exports. If that wording sounds confusing, well, it is. What seems to be happening is that the U.S. Commerce Department will allow a pair of oil companies to begin exporting what is known as ultra-light condensate to international markets, with only minimal refining. (The U.S. has long allowed exports of refined oil products.) That doesn’t mean U.S. oil companies can begin exporting all the crude they want; in fact, both Commerce and the White House, reflecting the political sensitivities around allowing domestic exports at a time when gasoline costs an average of $3.68 a gallon, have insisted that there has been “no change in policy on crude oil exports.”

But with domestic oil production approaching the capacity of U.S. refineries—and the oil industry putting all its considerable pressure on the government—it seems likely that U.S. oil will eventually be sold abroad. What effect that will have domestically is uncertain. A recent report by Goldman Sachs found that the ban on exports was a net economic positive for the U.S., at least until domestic refineries could no longer handle growing production of oil. But it seems clear that lifting or at least modifying the ban would likely lead to more production, as oil companies wouldn’t have to worry about their product being landlocked in the U.S. A report by the research firm IHS found that lifting the ban would lead to more than $700 billion in additional investment in oil extraction between 2016 and 2030, and would increase oil production by an average of 1.2 million barrels a day. And given that global crude demand is expected to rise by about that much over the next several years, that oil could be very useful indeed—especially if today’s fighting in Iraq is only the beginning.

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