The Great Energy Reversal

Source: Kent Moors, Money Morning  (2/13/12)

"The U.S. could finally become completely self-sufficient in its energy policy. But it does require that we change the way we approach investing in the energy market."


Don't look now. . .but the almost unthinkable is about to happen.

The United States could finally become completely self-sufficient in its energy policy.

You already know that our energy situation is undergoing a revolution, thanks to things we talk about here every week: huge shale gas surpluses, the highest domestic oil production volume in years, prospects for major gains in North American heavy oil production, and increased efficiency standards.

And you already know that this new vision will lead to huge profits for investors like you and me.

But it does require that we change the way we approach investing in the energy market.

This Is a New Kind of Self-Sufficiency

See, it's not that the U.S. market has suddenly figured out how to curb domestic demand levels.

And no—we're not going to stop importing from foreign countries, either.

No matter what anyone tells you, we will still be importing crude, and we will still have to worry about what happens in the Greek Parliament, or with Iran and the Strait of Hormuz.

It's that domestic sources will be producing a greater percentage of the energy we use (and that will have another tangible benefit).

The cost of oil is the primary focus here.

That means a fundamental transformation in the energy balance will be accompanied by a greater percentage of that balance marching to a different tune.

The energy sector reflects the essential pricing and availability component of its dominant element. Globally, that has been—and, for the next two decades or so, will continue to be—crude oil.

However, we are replacing rising portions of the mix by engaging alternative energies or domestic oil and gas.

And that accomplishes three rather significant changes.

Change No. 1: It Moves the U.S. Market from a Price-Taker to a Price-Setter.

Simply put, as a market becomes more dependent on other regions for its primary fuel, it defers pricing to its source.

The obvious secret: OPEC sets the price; the U.S. takes it.

In the case of using more American oil production, the overall price charged to the end user may not go down. In fact, one of the primary reasons we've relied on imports has been the dramatic difference between the low cost of production abroad and the much higher costs at home.

So, again, relying more on domestic production would not lead to a reduction in the price at the pump.

But it will put the costs more and more in American hands.

And that allows us to predict energy costs in what has been a foreign seller's market.

It also means that the imports that we use become secondary to the pricing dynamic, rather than the creator of it.

Change No. 2: Having Sufficient Domestic Volume Makes Us Less Susceptible to Pricing Spikes.

Remember, it's not that the local volume makes the imports unnecessary. And this is not a return to a vision where America is completely self-sufficient and removed from international events.

What happens elsewhere is still going to have an effect on the U.S market. The international oil market is integrated, and, well, international.

But it does mean that the cycles should be less severe.

Greater flexibility in where our energy comes from—with a rising percentage of our sources inside the country (or from Canada)—provides a genuine offset to volume disruptions abroad.

Change No. 3 (and most important): Crude Is No Longer "The Fuel of Choice."


Whenever the supply and demand for oil products is at issue, vehicle use is usually the dominant concern.

We tend to think first about the relationship between oil prices and transportation. . .the relationship between the cost of a barrel of crude and a gallon of gasoline.

Yet vehicles are only one of four major "use" categories. The other three are power generation, industrial and as feeder stock for petrochemicals.

And there, we have made major gains.

Substitutes in these other three categories—primarily from our domestic largesse of unconventional gas—are reducing our dependence upon crude oil as the fuel of choice.

In addition, as trucking fleets replace diesel fuel with compressed natural gas (CNG), there will develop a rising ability to temper the hold crude oil has on the most persistent source of demand for it (from our gas tanks).

Now, this is not going to happen overnight. The domestic replacement of reliance upon some of the crude oil and oil products import volume will not be inexpensive or quick.

Yet it sure does seem to be coming. . .

Just look at the spread between West Texas Intermediate (WTI) and Brent benchmarks. Brent has now been more expensive than WTI for 377 consecutive trading sessions (since Aug. 13, 2010). The spread stands at almost 19% of the WTI price beginning trade today.

And this isn't only about traditional supply and demand concerns.

International crises, the "Arab Spring," Iranian sanctions, and a host of other problems have prompted both benchmarks to increase. Clearly, though, the impact has been greater on Brent than on WTI.

Prospects for rising domestic sourcing in the U.S. has not been the major cause of that, but they will figure more prominently in restraining risk elements as we move forward.

Here's the Outlook for the Investor

More of the energy we use will either be produced here or transported in from Canada.

That is going to result in a more defined energy sector—one in which domestic elements have a greater determining factor in price.

The new environment will be unfolding over the next several years, and volatility will still have a thing or two to say about what the investor needs to do.

The international stage will still pressure both prices and availability.

But, as we roll out this new energy balance, what happens here in America will have a greater determining factor in our market pricing and value.

That will allow investment decisions to be made less on what some Ayatollah says, and more on what a domestic energy company does.

That should be the road to greater profits for us.

Sincerely, Kent

Kent Moors, Money Morning

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