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The Hidden Lesson in U.S. Gas Exports

by | published December 7th, 2011

It's the sort of headline that drives the barflies at my family's bar in Baltimore just crazy.

See, to them, it defies logic…

In September, the U.S. exported 430,000 more barrels of gasoline than it imported. The country is now on track to become a net exporter of refined oil products for the first time in 62 years.

Meanwhile, domestic prices at the gas pump are poised to rise to record levels.

Combine those two facts, and it appears you have a paradox.

The barflies blame government… oil companies… even the bartender… (we do have to factor shipping costs into beer prices).

“How,” they ask, “can we export so much gasoline, but gas prices are going through the roof?”

After suggesting an answer, I explain they need to ask another question…

They should consider this: “Why aren't they investing in companies poised to profit from this situation?”

You see, while consumers and politicians will spend all this time pointing fingers over this story, a real lesson on the energy markets continues to emerge…

And it's a lesson that savvy investors and readers of OEI have heard before: Where and how to profit when news like this breaks.

Nothing New to See Here…

Since the inception of Oil & Energy Investor, Kent has written at length about the new age of domestic energy production taking place in the United States.

And why?

Because it's the biggest energy story to hit our shore in decades…

New oil and gas shale plays across the rural United States have provided access to a wealth of new supplies once considered unattainable. The levels of production will allow the U.S. to export more natural gas within the next few years, thanks to large-scale projects like Cheniere Energy's Sabine Pass terminal in Louisiana.

And then, over the weekend, we learned that the U.S. refiners are producing excess levels of gasoline on our shores, even as overall demand for the fuel has dropped.

But for all of the positive sentiment about natural gas production in this country, there has been increasing negativity about this divide between gasoline exports and prices at the pump.

The reason is that consumers feel this in their wallets.

Tack on rising fuel standards, expansions in ethanol production, and greater efficiency on the part of consumers, and the outrage and confusion slowly builds.

Like Every Other Commodity…

Companies like Chevron (NYSE: CVX), BP (NYSE: BP), and Shell (NYSE: RDS.A)are using the country's expanding refining capacity, and, in turn, shipping fuels to fill up gas tanks to our three largest customers, Brazil, Mexico, and Chile (among other locations).

There's obviously demand abroad, even if it has slumped here.

In the past 10 years alone, China's rate of auto ownership has more than doubled. (And, remember, many Chinese cars aren't as fuel-efficient as the ones in our garages.)

We're in a globalized world of rising demand, and cheap, high-quality oil supplies have become far scarcer. Refined gasoline is bought and sold on international markets, just like gold, soy, or any other fuel… and global demand is on the rise.

So “the bar question” becomes this: Shouldn't companies be required to keep this excess gasoline in the U.S. and flood the domestic market in order to drive down prices?

It's a delicate and universal question – not only here United States, but also every energy-producing nation around the globe.

As Kent noted on Monday, Russia is currently experiencing one of the greatest political shakeups in the last 30 years. Russian producers have been trading their fuels on the international markets, just as American multinationals are sending their gasoline around the globe.

But central to Russian voters concerns are the cost of rising fuel costs at home, even though they are the largest producer of oil in the world. Russians want to see greater spoils of their own production fill their own tanks and fuel their own homes.

Certainly, that sentiment is shared here as well…

Still, what we do know is that setting such quotas on U.S. refineries would also likely lead to the gradual offshoring of this production.

There are many other places around the world eager to boost their own refining business.

Advantage United States – for Now

U.S. refineries currently enjoy cost advantages that those in Europe simply do not.

These include lower costs in environmental compliance and labor, and access to higher-quality crude with less sulfur and other impurities (all of which would increase the cost of gasoline refining).

For now.

But we have to ask: Are these export figures will be permanent, or are they just a short-term trend poised to flame out in the coming months or years?

The long-term trend, for refinery construction and processing points, is to places where gasoline and other byproducts will be ultimately be consumed, meaning either right next door to or in these emerging markets.

Currently, refining efforts in China are ramping up quickly to meet rising transportation fuel demands, and a swath of refiners are set to go online in the Middle East in 2013 and 2014.

How producers plan to shake up their supply chains and what they do with supplies destined for these markets remains to be seen…

Profiting on Pain at the Pump

But while everyone else is focused on that question and shaking their fists at the government, or oil companies, or foreign consumers… we're looking for the real story.

We want to know how to profit…

And just like last week, the story remains the same.

There is good money to be made on midstream production here in the United States and abroad. (Last week, I highlighted the benefits of investing in midstream MLPs).

Whether it's natural gas, shale oil, or a refined product like gasoline…

Someone has to ship, store, and process these fuels.

You want to park yourself in the “sweet spot” of transportation, storage, and refining, and recognize that no matter which way the price of oil or gasoline goes, so long as the fuels keep flowing, you're going to make some money.

That should offset some of our pain at the pump…

Sincerely,

James

P.S.: In case you missed it, Kent made a huge announcement today.

We've been talking about it all morning, and it's already creating a huge buzz.

And you can still hear this annoucement, by clicking here.

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  1. March 15th, 2012 at 00:58 | #1

    This sounds great but, I have no credit card. Unless you/someone know a magic trick ya’ll can do, it’s no good for me.

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