Recent statements by OPEC officials reveal a situation that investors, consumers, and the news media have yet to fully appreciate: The Organization of the Petroleum Exporting Countries has lost control over the price of oil.
Ironically, during the era of Arab oil embargoes in the 1970s, this would have been great news. But today, the cartel is pumping as fast as it can -- and it still isn't enough to keep the price of crude within OPEC's target range. As spot prices top $56 a barrel on what seems like an inexorable march toward $70 or higher, Kuwait's energy minister tells the Associated Press that a "careful rethink is required about the current state of the market, which appears to have undergone some structural changes recently."
No rethinking is necessary. The situation is painfully simple: Global demand is now greater than available supply -- not so much of crude as of refined products.
Indeed, no matter how much crude OPEC pumps out of the ground, oil markets will continue to be plagued by a shortage of refining capacity, particularly in the United States. That leads to America's having to import gasoline from other countries, and that in turn cuts into gasoline supplies overseas. A big related problem is the disconnect between what comes out of the ground and what can go into refineries. More and more of the world's crude is "sour," which is bad for the rapidly developing economies of Asia, where refineries often require "sweet" crude. With its high sulfur content, sour crude requires more processing.
New rite of spring
Consumers need to get used to a new rite of spring. Call it "shoulder shock," the first cousin of sticker shock.
The shoulder period in the energy industry occurs in spring, when refineries switch from maximizing heating oil to maximizing gasoline. (The switch reverses in fall.) With refinery capacity so tight from the outset, and with refineries also needing routine maintenance during this stretch, the shoulder period inevitably produces greater tightness. No surprisingly, gasoline marketers use the pressure of the period to push through price increases that would face political outrage at other times of the year.
To wit: The national average pump price recently jumped a whopping 5.7 cents in just one week's time, with hardly a peep out of the usually vociferous Democratic opposition in Washington. One exception was Sen. Ron Wyden of Oregon. Although he didn't launch into the type of "price fixing" diatribe that we've grown accustomed to hearing on Capitol Hill, Reuters quoted Wyden as saying simply, "When gasoline prices go up to this degree, family finances suffer -- and not just at the gas pump, but also at the grocery store and the department store, too."
If -- as I suspect -- this year is like last year, shoulder shock will probably reach its peak around Memorial Day. After that, pump prices should actually decline as we head into the Independence Day holiday and the peak summer driving season.
To be sure, there's an easy way to eliminate this nasty new rite of spring before it takes hold of our wallets: Build more refineries.
All of those who wouldn't mind having an oil refinery built in their back yard, raise your hands.
Still, as much as this new rite of spring promises to be a lasting pain in the neck for consumers, it offers a new opportunity for investors.
The key, in my opinion, will be to make your move before the media does its thoroughly predictable round of doom-and-gloom stories, thereby creating an echo effect that winds up depressing broad equities markets while raising energy shares. It's too late to act this spring, but if my theory is correct, there will be new opportunities every spring -- and, to a lesser extent, every fall -- for years to come.
How can an investor know when the time is ripe? The Amex Oil Index (Index: XOI) offers a clue. This year, it started shooting up right around Feb. 1, during the dead of winter, and didn't stop until nearly mid-March, just as the media was gearing up. If you are more of a seat-of-your-pants investor, pay attention to when your local TV weatherman starts counting the days to the official arrival of spring, or when major league pitchers and catchers report for spring training.
What should investors do? Well, if you buy into the argument that this situation is real and here to stay, the weeks immediately before the shoulder period could become a traditionally good time to buy oil marketers -- companies such as ExxonMobil
Fool contributor Bill Paul is a former energy and environmental reporter for The Wall Street Journal and CNBC. He does not own shares in any of the companies mentioned.