U.S. Energy Boom Won't Change Anything

Despite the previous woes of the American energy industry, there is a wave of optimism around the production of domestic energy. We may have a long way to go before we can consider ourselves energy independent, but we're heading in the right direction.

Whenever times are getting better, it's easy to get caught up in hyperbolic rhetoric. Mostly because we want things like $2.50 a gallon gas and for the country to be a net exporter of oil. Unfortunately, we need to take a step back and realize there are some things that are just not going to change. Here are three things that will still happen no matter how strong the U.S. energy resurgence may be.

Oil prices will still go up
For those of you who were holding out for the potential of gasoline costing less than $2.50 a gallon, I'm sorry but that's just not going to happen. Yes, American production has increased to its highest level since 1985 and, yes, oil consumption has gone down 11% from its high in 2005. But, we need to keep in mind that oil is a global commodity and the U.S. is only one part of the equation.

Source: U.S. Energy Information Agency, authors' calculations 

To a certain degree, prices are dictated by how much the weakest links are willing to pay for oil. In this case we have China and India, two booming economies with less than 1.3% of the worlds total petroleum reserves combined. Skyrocketing demand and lagging domestic production have vaulted China and India to numbers one and four in total oil imports, respectively. 

As much as we like to believe that American companies would not let foreign demand drive domestic prices, ask yourself this question: If you were a major manufacturer and saw that your product commanded a much higher price overseas than domestically, then you would probably sell to that market, right? The same can be said for oil. Refining specialist Phillips 66 (NYSE: PSX  ) currently aims to export about 375,000 barrels per day of finished products from its refineries across the U.S. because there is much greater opportunity in markets overseas.

U.S. imports will never go away
At the peak of U.S. oil imports in 2005, we were importing from 86 different countries. The varying characteristics of all these different types of oil made American refineries extremely adept at processing crude. In particular, refineries in the Gulf of Mexico have become particularly good at refining heavy, sour crudes from Venezuela and Mexico. Valero (NYSE: VLO  ) , the largest independent Gulf Coast refiner with a capacity of 1.7 million barrels per day, sources over 53% of its Gulf Coast refining capacity from heavy, sour crudes.

Today, many newly discovered unconventional sources are very light, sweet, and easy to refine. Since our Gulf Coast refineries are still geared toward heavy, sour crudes, we will continue to import that grade to use in these facilities. In fact, one type of crude oil that is strikingly similar to Venezuelan and Mexican crudes is Canadian oil sands. Canadian oil sands are in desperate need of refineries capable of treating this heavy mix, and Gulf of Mexico refineries are just the type of refinery these crudes need. This is the driving force for Canadian pipeline companies TransCanada (NYSE: TRP  ) and Enbridge (NYSE: ENB  ) expanding their takeaway capacity to the Gulf through the Keystone XL and the Trunkline conversion, respectively.

Even if the U.S. were to no longer "need" oil imports to meet its energy demand, it is more than likely that refiners will continue to process imported crudes provided that is the most financially lucrative option. It's all a matter of what we can buy at the lowest price and sell for the highest. 

Coal will still be a top energy source
It's easy to be down on coal. Ever since shale gas started flowing in the U.S., many have speculated that it would replace coal because it was a more emissions-friendly fuel source and it was less expensive. While that may look to be the case (and several trends in the U.S. back it up), the truth is that coal will remain a dominant force in the energy game. To take it even further, the EIA estimates that coal will surpass oil as the premier energy source by 2017. This is in large part because of two factors: natural gas requires a robust infrastructure to transport, an infrastructure many developing nations do not have, and several countries have natural gas prices indexed to oil, so its price is kept artificially high. This is mostly how American coal company Alliance Natural Resources  (NASDAQ: ARLP  ) was able to post a record 2012 in both sales and production.

Admittedly, coal use is expected to decline severely. But just like in the case of America's decline in oil consumption not affecting prices, America's decline in coal consumption will not be enough to make a huge impact on global coal consumption.

What a Fool believes
For many years, America was the lightning rod for the energy industry. Today, it is becoming more and more just one cog in an extremely vast and complex system. Will the U.S. energy boom have a profound effect on global energy supplies? Absolutely. Will it send the world into a global supply glut resulting in exorbitantly low oil prices and make us the commanding force on supply? Probably not. The U.S. energy boom might not be the silver bullet for everyone's energy woes, but remember that it's getting better all the time.

Even if you personally may suffer from expensive oil prices, it doesn't mean your portfolio has to as well. If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.


Read/Post Comments (6) | Recommend This Article (4)

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 April 06, 2013, at 12:27 PM, automaticsteam wrote:

    One thing will change: The geological, and tectonic structure of the continent...

    We are going to find out (too late as usual), we are in deep do-do. I will explain, if anyone wants to listen, but I am getting tired of wasting my breath.

  • Report this Comment On April 06, 2013, at 12:59 PM, marblearch wrote:

    The US is a multi-national. The interest of Corporations are paramont. The common good is not spoken in the corridors of government or industry. We have the industrial/government complex where loyality is to wealth and power. Let them eat cake is their matra. The US is as they say is, Gone baby, gone!

  • Report this Comment On April 06, 2013, at 1:10 PM, designdoc wrote:

    Hurrah, we now have enough petroleum to poison the planet and future generations, removing the storage built over hundredes of millions of years in a couple centuries. Our sense of disregard for our progeny and environment reflects our audacity and stupidity. Shame on these generations.

  • Report this Comment On April 06, 2013, at 1:39 PM, GeorgePolitico wrote:

    Profitable corporations and their owners pay plenty of taxes. There is the corporate income tax, personal income tax on dividends, capital gains tax on stocks, payroll taxes, sales taxes, drilling fees, and so on. And when corporations put people to work, the employees also pay taxes. The monetization and taxation of America's fossil fuel reserves is our best hope of reducing our enormous and extremely dangerous public debt. It remains to be seen whether we can afford the environmental cost--but our fossil fuel reserves are our single best hope for avoiding a replay of the 1930s and 1940s, this time in a world full of nuclear weapons.

  • Report this Comment On April 06, 2013, at 2:06 PM, AllenElliott wrote:

    This is why we do not want global governance, it just creates greater corruption

  • Report this Comment On April 06, 2013, at 3:39 PM, mlpnola05 wrote:

    This article has completely missed the point. You have to remember that North America was considered a region with depleted oil and gas reserves with few prospects for new economically feasible production prospects just a few years back. New technology in the search for and extraction of oil and natural gas has driven the drastic increase of U.S. production. That technology has yet to be applied everywhere around the world. When that new technology is applied in places like Venezuela, Russia and other major energy producing countries, not to mention smaller producers like China and India, then the actual known world energy reserves will also drastically increase. That will be the real game changer in the world energy markets.

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