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"The OPEC states -- even the rogues that aid terrorist groups -- will have a market for their product, and unilateral action by the U.S. would lead to much more damage than good, both economically and politically, with only downside for U.S. energy companies, their employees, and investors -- like Pickens."
-- This author, January 26 article
When I took issue with part of T. Boone Pickens' stance on OPEC, stating that his ideas were dangerous to domestic oil producers, I wasn't expecting to get a direct response from Pickens himself. However, the co-founder of Clean Energy Fuels, owner of private investment company BP Capital, and hardcore advocate of wind and natural gas through his Pickens Plan, reached out to to offer specific thoughts and feedback.
While I walked away from the conversation with essentially the same -- if a little more moderated -- opinion, Pickens' insight is certainly worthy of sharing with readers.
Social commitments change the game
There's no denying that the actual cost of getting oil out of the conventional oil fields in Saudi Arabia, Iran, and other Persian Gulf states is significantly lower than producing from shale reserves like the Bakken in North Dakota and Montana. Primary oil producers like Continental Resources (NYSE: CLR ) , and companies like Pioneer Natural Resources (NYSE: PXD ) and Ultra Petroleum (NYSE: UPL ) , which are increasingly producing more oil, rely on oil prices remaining relatively high. OPEC nations could artificially drive prices lower by ramping up output, pushing global oil prices down, causing real harm to U.S. producers, in the event the U.S. made a decision to cut off OPEC imports.
However, Pickens asserts that the events over the past few years, starting with the "Arab Spring" in 2010, which saw no less than four government overthrows and a half-dozen serious protests in other countries, have caused rulers in the region to see the risks of civil unrest. The biggest oil producers, like Saudi Arabia, Kuwait, and Qatar largely managed to avoid social unrest due to massive social programs that are funded by oil. Pickens believes that Saudi Arabia alone spends $60 per barrel of oil -- approximately $9,000 per year per Saudi citizen -- on social programs. As Pickens points out, this dependence on oil revenue for social programs represents a real threat to the Saudi royal family if oil prices head south. This likely extends to other, smaller kingdoms, with similar per-capita spending to support -- and pacify -- its citizens.
Publicly, Saudi Arabia seems to be favoring U.S. oil. Saudi Oil minister Ali al-Naimi recently said that shale oil "is a welcome addition to the world's reserves."
Growing global demand helps; the free market is key
When I asked Pickens specifically about the government's role in this, his answer wasn't direct, but the point was clear. He advocates for a "North American Energy Alliance," as he calls it, and there's a lot of truth to the potential for the U.S., Canada, and Mexico being stronger trading partners in oil. The heart of his argument is a simple one. It doesn't make sense for Canada to send its tar sands oil to the Canadian coast and ship it thousands of miles away to Europe or Asia when the U.S. is importing massive amounts of oil from the Middle East and Venezuela.
The recent positive news for Transcanada's (NYSE: TRP ) Keystone XL, passing a big hurdle and moving closer to approval, could be one step toward making this "Energy Alliance" a reality. Not only is America's political relationship with Canada and Mexico stronger than any of the OPEC producers, the economic benefits of regional oil, versus transatlantic shipping, aren't fictional. While there are environmental concerns with stretching a massive pipeline across the middle of the country, the bottom line is this Canadian oil is going to be produced and sold on the market. Importing it into the U.S. would simply offset imports from another part of the world, and wouldn't require unilateral action by the U.S. government to cut off any of the OPEC suppliers directly.
As to Mexico's role, recent moves to allow government-owned Pemex to partner with private companies to increase its production could potentially lead to even more offsetting of overseas imports. For U.S. producers like Continental and Pioneer, with strong technical expertise in shale production, the Mexican market could present an opportunity for growth over the next decade.
Final thoughts: Government should get out of the way while fostering development
Pickens has pointed out many times that the U.S. doesn't have an energy plan. With the Keystone XL pipeline, for example, the Department of Energy has played almost no role. The State Department handles the cross-border aspect of the pipeline, and was the key agency handling the environmental study just completed. Though the Keystone XL would tie into U.S. pipelines feeding domestic refineries and not reach the Gulf for export, any exporting of oil would be the purview of the Department of Commerce.
Pickens points to this lack of a singular entity being involved as one of the problems with America's energy policy. At the end of the day, it seems that his focus is more on the government getting out of the way by approving the Keystone XL pipeline, while also helping to accelerate the advancement of wind, solar, and natural gas through legislation like the Natural Gas Act -- which would pave the way for adoption of NG as a transportation fuel.
While Pickens' rhetoric may be aggressive at times, the core of his beliefs certainly rings true, as long as the economics of expensive oil and cheap domestic natural gas hold up. For that to remain the case, the U.S. will likely depend on at least some OPEC oil for the foreseeable future.
Bad news for OPEC could be good news for investors
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