3 Huge Energy Myths and How You Can Profit

The hardest part of making any decision -- investment or otherwise -- is having the right facts.

And if you rely on conventional wisdom for your investment decisions, you're often basing your decision on merely the most widespread myths, rather than sound information. As one of my Foolish colleagues says, conventional wisdom is long on convention and short on wisdom.

To make money in the market, you need to avoid the myths that only seem true and focus on the facts that can make you money. Perhaps in no other sector are myths more pervasive than in energy. Here are three biggies from the blog Sober Look and my take on what it means for investors.

Myth No. 1 -- The U.S. imports a majority of its oil from the Middle East
The way politicians howl about oil imports, you would think the U.S. owed three kidneys and a liver to Mideast oil despots. But as you can see below in the chart of the top 10 sources for U.S. oil, the U.S. produces about half of its own oil, while it imports the most from Canada, according to the Energy Information Administration.

Saudi Arabia still comes in at a strong 8% of total U.S. oil use, but the only other Mideast country in the top group is Iraq, at a meager 2%. Where's the outrage at Canada for shipping us oil?

With some of the largest oil companies in the world, in the form of ExxonMobil and Chevron, the U.S. is still the third-largest producer of oil, behind Russia and Saudi Arabia. Those companies have prospered with the advent of $100 oil and will continue to do so as the world's voracious appetite for oil grows and prices soar.

Source: U.S. Department of Energy.

Still, despite producing half of its oil, the U.S. imported some $280 billion of oil from January to October 2011, making it the world's largest importer of oil, according to a recent Associated Press report.

Myth No. 2 -- U.S. domestic oil and gas production continues to dwindle
Again, not true. As oil prices continued to rise over the last decade, formerly unprofitable sources of oil in the U.S. became viable energy plays. Those new sources include the shales of North Dakota, Montana, and Texas, among others. Chesapeake Energy and SandRidge Energy (NYSE: SD  ) have huge footholds in such unconventional resources.

According to Eurasia Review, the rising price of oil and those new sources helped reduce U.S. dependence on foreign oil from about 60% of consumption in 2005 to less than half now. In fact, some analysts think these unconventional sources could make the U.S. the world's largest oil producer again.

For income seekers in energy, SandRidge has spun off assets to SandRidge Mississippian Trust I (NYSE: SDT  ) . The trust had its IPO in April and has already been distributing higher-than-expected payouts. But if you're looking for a dividend payer with more experience under its belt, you might consider BP Prudhoe Bay Royalty Trust (NYSE: BPT  ) , this millennium's best dividend performer. Please note that most trusts are depleting assets with finite lifetimes, so the dividend will stop at some point.

And domestic natural gas production continues to grow, too. In shales across the U.S., formerly inaccessible natural gas can now be drilled economically. According to the EIA, shale gas production has moved up incredibly, growing 47% in 2009, and shale gas reserves skyrocketed 76%. Chesapeake and SandRidge are involved here, as well.

Gas offers another good advantage. Because of its geographic dispersion (relative to oil) and location in politically stable areas, gas is more suitable for energy security. That means you needn't turn to more risky companies such as Hyperdynamics (AMEX: HDY  ) , an exploration-stage company in offshore Guinea that just reported higher-than-expected drilling costs and is plagued by operational problems. Domestic plays such as SandRidge and Ultra Petroleum can still offer solid upside.

Myth No. 3 -- The U.S. does not export energy because of a lack of energy resources
While the U.S. is still a net importer of energy, it does export significant energy, and that amount has been climbing rapidly in the past few years.

In fact, for the first time ever, in 2011, America's top export was fuel. That's a big shift, since just 10 years ago, fuel didn't even number among the top 25 exports. Over the last five years, the exports list was topped by aircraft.

That's striking, but even more so is the fact that 2011 was the first year since 1949 that the U.S. was a net exporter of fuel, according to an AP report. Annual fuel exports were worth some $88 billion. That's being driven by (1) lower U.S. consumption due to a sluggish economy and more efficient vehicles, allowing refiners to export their surplus, and (2) higher prices, which make those exports worth more.

America's cheap and plentiful natural gas has also given well-positioned companies the ability to export. Cheniere Energy (AMEX: LNG  ) and subsidiary Cheniere Energy Partners are planning a liquefied natural gas export facility on the Gulf of Mexico to begin operation in 2015, although they're still working through how to finance it. But the parent company has already signed multiyear export deals.

Foolish bottom line
It's important (and profitable) to get away from the myths that dominate so much of the popular discussion about energy and get down into the real information that can make you money. Our analysts have prepared a special free report that highlights one dominant energy company positioned to excel across the globe. We call it "The One Energy Stock You'll Ever Need," and you can get instant access to the name of this company for free -- just click here

Jim Royal, Ph.D., does not own shares of any company mentioned here. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (23) | Recommend This Article (75)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 06, 2012, at 5:20 PM, UAf1yer wrote:

    What is missing here is to understand the 50 year energy policy is to exhaust everyone else's resources first, so there is a domestic supply cushion.

  • Report this Comment On January 06, 2012, at 9:06 PM, Chontichajim wrote:

    I like BPT which is not due to run out for about 15-17 years so should be safe to hold for 5-7. Since the income varys somewhat with gas prices (except Alaska takes most windfalls) you receive more income when you need to pay the most for gas. Definitely not for the capital gains investor, but takes some of the sting out of gas prices.

  • Report this Comment On January 06, 2012, at 11:30 PM, billmitts wrote:

    BPT is paying annual dividends of $7.83, with a share price of $117 that is a 7% return even with a price increase of $19 it still falls short of SDT with a 10% dividend and 25% price increase.

  • Report this Comment On January 07, 2012, at 3:32 AM, BBLBBD wrote:

    No doubt we are sitting on some powerful energy sources, but two things to consider: 1) the EPA and the green lobby, of course. They want to put us behind on any energy source whatsoever; and 2) the energy companies are shooting themselves in the foot by conceding some of the green lobby propoganda, mainly that the fracking is causing earthquakes. What the !?!

    Just because the procedure can be measured on the earthquake scales does not mean it causes "earthquakes" by the common definition. If those companies are willing to lose the propoganda fight, then they are all history.

    Any major event will register on the richtor (spl ?) scale. That does not mean it is an earthquake.

    Once that definition is conceded, then this game will be up....too expensive. Unfortunately, I do not see that these companies are smart enough to play the modern liberal game.

  • Report this Comment On January 07, 2012, at 4:44 AM, The1MAGE wrote:

    Wait, no. According to Peak Oil theories, we are going to run out of oil in 1989, uh I mean 1999, uh I mean 2005.

    Okay, seriously, I won a bet (social, not monetary) in 2008, because I understood something about the oil industry. People were convinced that oil prices would never come down below $90 again. But (at least at that time) there were companies that only were functional if oil was above about $70 a barrel. They couldn't compete against the big guys to keep their production prices down, but the big guys couldn't afford to tap the less productive wells.

    Increased prices brings out an increase in production. Reduce the price, and people quit looking.

    What is funny is the term "it's a finite resource", which is absolutely true, it is a finite resource. But so is the fuel for the Sun. Just another 4 billion years and poof, it runs out. (Well kind of.) People just don't know what finite means.

    And can anyone tell me where the theory that "we are trying to get all the other countries to run out of oil so that we are the last ones to have it" came from? I have heard this before, and it always sounded like one of those nut job theories. Problem is I can see politicians actually thinking this moronic way, not even realizing that oil as an energy source could be replaced by something else.

    Imagine deciding many years ago that you were going to become the biggest typewriter producer in 50 years? Not a good position to be in right now, is it?

  • Report this Comment On January 07, 2012, at 9:55 AM, fatearthworm wrote:

    Things can be in better balance, the EPA, IN MY OPINION, has gone too far, the environmentalists have become extreme.

    Gentlemen, we must work together, we are on the same team.

    I am neither a liberal nor a conservative.. I try to be a realist.

  • Report this Comment On January 07, 2012, at 1:18 PM, idanpl wrote:

    good article, I wasn't aware of this information.

  • Report this Comment On January 07, 2012, at 5:59 PM, mikecart1 wrote:

    A solid article with lots of info. Then I saw the author and was not surprised. Jim Royal is like the MVP of TMF! :)

  • Report this Comment On January 07, 2012, at 8:21 PM, gdf55 wrote:

    I remember an old episode of "Dallas" where J. R. Ewing says that what he needs most is to get oil above $28 a barrel, then does some stuff to make it happen.

    Granted, it was just a TV show, but there was a ring of truth to it then that still rings true today.

    The whole oil business, and in particular the price we pay at the pump - seems to be driven by the spot price for short-term oil contracts. Exxon's profits are driven by it. Speculation is huge. It says a lot that we are talking seriously about building a pipeline to move oil from Canada to the Gulf so it can be shipped OUT to other countries. Any common-sense approach to this problem would recognize oil as a strategic national resource and find ways to reward oil exploration that keeps the oil in the country.

    Another interesting aspect of the "price of oil" is that, in truth, a significant portion of it is the cost of SHIPPING it around the world. $80 shale oil looks pretty cheap when Saudi oil has to make a 10,000-mile journey to get to our refineries.

  • Report this Comment On January 07, 2012, at 8:35 PM, gdf55 wrote:

    @BBLBBD. I don't know where you live, but I live in the Midwest. Our water supply is 100% sourced by aquifers, which are essentially underground porous layers where water accumulates. The one our community sits on top of is actually an underground river - the water flows laterally. Nineteen deep wells in the area pump water out of the aquifer for treatment, storage, and distribution.

    So it's kind of a cheap shot to blame the EPA and some vague "green lobby" for hindering shale oil/gas exploration, as though this were just a political problem. We absolutely, positively have to get this one right, because our sole source of drinkable water is at stake. We need to be concerned about what might happen upstream, and we need to be act responsibly about activities that could affect the aquifer downstream.

    Some people who argue in favor of fracking point out that there are significant differences in the depths of the resources - our aquifer is maybe 700' deep, and the frackable shale is typically 12,000' down. The concern is that the oil wells have to traverse the aquifer, and anything that compromises the well housing can contaminate the aquifer. Not only is that a realistic scenario, it has already happened in other states.

  • Report this Comment On January 07, 2012, at 11:13 PM, devoish wrote:

    You're myth mixing. It is not a myth that US oil production has declined. US oil production peaked in 1983 at 9,000,000 bpd. Today it is 7.800,000 bpd including unconventional sources.

    So, as predicted oil production in the US has peaked and is now past peak.

    Gas production was never part of that truth, but eventually it to will dwindle.

    The US imports a majority of its oil from the middle east was also never a myth.

    People rightly understand that most of our imported oil comes from the middle east. On your chart, "other" is the middle east. Other, 9% plus Saudi, 8% plus Iraq 2% eclipses any other source. Please do not start a "myth" of the middle east only being Saudi Arabia.

    Now that we are done cleaning up the myth mess, your thesis of an increasing fossil fuel energy supply does not make the suppliers good investments. Decreasing supply along with an increasing demand would be a better thesis. However as you note, in the US demand is decreasing primarily do to small victories in the long fought battle against oil producers to mandate increased energy efficiency.

    What is also left out is that the same technology that has made more fossil fuels available to domestic sources also makes more sources available to foreign sources. The countries that are increasing demand are not big customers of US oil. The US does not make the top 15 list of oil suppliers to China. Neither are we a top ten supplier to India.

    While it will be a long time before the US stops using oil and gas, unconventional oils are on the wrong side of the energy cost curve and heading upward, especially as compared to renewables, whose costs are declining.

    From my perspective the overwhelming macro forces on energy are increasing costs of fossil sources vs, decreasing costs of renewables battling for fewer US dollars. It is no longer an oil market. It is an energy market. The Volt, the Leaf, the tractor I converted to run on electricity, the geothermal heat in my house, the solar panels on your roof, the 10% ethanol in your gasoline, the high efficient light bulbs, the extra insulation in your attic are all doing work that fossil fuels no longer do.

    Best wishes

    Steven

  • Report this Comment On January 07, 2012, at 11:35 PM, TMFRoyal wrote:

    Hi, Steven,

    I pulled oil info from the EIA website, which you can see here:

    http://www.eia.gov/pub/oil_gas/petroleum/data_publications/c...

    To summarize, besides Saudi Arabia and Iraq, the only other Mid East nations in the top 15 are Kuwait and Oman, which together make up about half of Iraq's total, or 1% total. Any other amounts beyond Iraq and Saudi Arabia are largely irrelevant. In other words, the "other" 10% comes from mostly non-Mid-East sources.

    Much of the venomous rhetoric of energy independence is directed at Mid-East nations (and not Canada), when in fact the Mid-East comprises a relatively small portion of our overall oil consumption (about 11% total). The propaganda and rhetoric lead you to believe that the U.S. is largely dependent on Mid-East oil, when it isn't. That, to me, makes a myth.

    Jim

  • Report this Comment On January 07, 2012, at 11:40 PM, TMFRoyal wrote:

    I'll also add that total petroleum imports from the Virgin Islands outdoes even Kuwait, which is 15th on that list.

    Jim

  • Report this Comment On January 08, 2012, at 3:02 AM, devoish wrote:

    Jim,

    You do not know that the other 10% comes from mostly non-mid east sources. At least not from the data you referenced. From the FAQ's;

    "About Half of U.S. Petroleum Imports Come from the Western Hemisphere

    Some may be surprised to learn that 49% of U.S. crude oil and petroleum products imports came from the Western Hemisphere (North, South, and Central America, and the Caribbean including U.S. territories) during 2010. About 18% of our imports of crude oil and petroleum products come from the Persian Gulf countries of Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates. Our largest sources of net crude oil and petroleum product imports were Canada and Saudi Arabia"

    But that was really not the horse I wanted to beat to death. I was taking exception to your interchanging the terms "mid east" and Saudi Arabia to make a point as if they are the same thing even before I knew that in this case it makes the difference of 10% up to 18% of our imports. I was also taking exception to your taking the "oil production decline predictions were wrong" myth and turning it into an oil and gas production myth to make a point as if they are same thing. The myth, as described at 4:44 by the1MAGE is that peak oil theory is the myth, and US oil production has not declined. Unfortunately US oil production has declined since 1983. Peak oil theory was not wrong and adding "gas" to the story misrepresents the myth. I have even seen "experts predicted peak oil in Pennsylvania" supposedly disproven by the total US oil production twenty years later.

    The point of your myth, " that believing most of our imported oil comes from the middle east is wrong" is not incorrect, but collectively the middle east is still the biggest single source and it was incorrect to suggest it is not, and turn the entire middle east into Saudi Arabia and represent a fact concerning Saudi Arabian imports (10%) as though it could disprove a myth about middle east imports (18%).

    When it comes to energy myths, I find the propagators of myths interchange terms that do not actually mean the same things, such as "renewable" and "alternative" (happens in almost every pro fossil fuel article) and it was a red flag to me when the middle east became Saudi Arabia, and a peak oil myth that used to be just oil became one about oil and gas.

    Best wishes,

    Steven

  • Report this Comment On January 08, 2012, at 2:45 PM, momklok wrote:

    My blood gets up to a boil when you recommend companies who are involved in destroying our environment, using slave labor and have shipped our jobs overseas. You need to be patriots not just money grubbers.

  • Report this Comment On January 08, 2012, at 3:33 PM, TMFRoyal wrote:

    Hi, Steven,

    The source of imports is quite clear from the link I provided. Although I had to pull info on U.S. production from elsewhere, the info from that link provides the Top 15 foreign sources of U.S. oil consumption. With the U.S. providing about 52% of its own oil and the top 15 other sources providing about 46%. That leaves exactly 2% that could be filled by other Mid-East nations. As I mentioned before, those Mid-East nations included Saudi Arabia (8%), Iraq (2%), and Kuwait and Oman (about 1% together). Any further very minor additions are basically irrelevant.

    You may be getting the idea of imports and total consumption conflated. Your quoted source (from the FAQ) indicates as much. I've provided a picture of the whole pie of U.S. consumption, not just the imports. Naturally, the Mid-East provides a bigger share of a set including only imports, as does Canada. But if you look at the whole pie (and not just imports), their shares are a much more modest part of total oil use.

    Jim

  • Report this Comment On January 08, 2012, at 9:21 PM, devoish wrote:

    "You may be getting the idea of imports and total consumption conflated".

    You are correct, I did conflate the two. The "myth" that the US imports most of its oil from the Middle East was still never a myth, at least I don't think it was. The myth that most of our imports come from the Middle East has died a hard death, but it has now been killed, at least for me.

    Best wishes,

    Steven

  • Report this Comment On January 09, 2012, at 2:04 PM, heball wrote:

    I've dabbled in other securities over the last couple of years, but found myself coming back to what works, pipelines and oil trust. There's other fine equities available out there, but don't see oil going away in my lifetime either. I figure as long as folks pull in to fill 'er up, I'm pretty much secure here. In Ohio we've known about Canadian Oil for quite some time based on our refineries. Now if we can just get rid of them pesky earthquakes and keep them from contaminating the aquifers. ;-) I've lived through 7.6s earthquakes overseas, never witnessed contaminated water tables in the 17 years I was living abroad. Not saying it couldn't happen, but with current technology and engineering, my money is still in oil.

  • Report this Comment On January 13, 2012, at 12:42 PM, 100tradejack wrote:

    With so many great stocks setting up now, and breaking starting to happen in earnest, why mess around with this stocks?

    Jack

    100 TRADE JACK

    ENST

  • Report this Comment On January 13, 2012, at 12:52 PM, 100tradejack wrote:

    Yes, good article. But with so many good stocks setting up now, and with breakouts happening in earnest, I wouldn't mess with any of the above names.

    Jack

    100 TRADE JACK

  • Report this Comment On January 13, 2012, at 7:15 PM, Fonz56 wrote:

    Whoa, got a eyefull here! An eyeful but still betting on this country and companies that are investing here. I own four oil stocks(mostly new start up companies) and intend to hold them. Up to now they haven't disappointed me. Several American are or have been, but I have no thoughts of selling them. I.E.: GE, CSX, etc.

  • Report this Comment On January 14, 2012, at 2:54 PM, decebalvs wrote:

    Yes, you are totally correct. The supply of oil is infinite. The Middle East can go away for all that we care, that will not affect the prices here one bit.

    And we don't need to spend one second to calculate scientifically the future energy balance in the world economy, because we have myth busters who are much less boring that math teachers.

    Not fools, idiots.

  • Report this Comment On January 17, 2012, at 11:24 AM, Stockinv wrote:

    I agree with your percentages for the most part. Also, I have made money trading energy stocks and the ones you mentioned are good investments for trading or long term. I have owned some of them and now own some others not mentioned. One point I would like to make is the cost of oil is based on the world supply and if any one of the producers has a production problem then the cost will go up and it does not matter if we import from the Middle East or Canada or anywhere else. Very good article and you did your homework well.

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