What I’ve Learned on My Trip to D.C.
It is 4:30 a.m. as I write this from the nation’s capital. I’ve been in D.C. for the past few days to attend a series of meetings on a major development in the energy markets that is about to become breaking news.
Meetings like this are crucial since they provide me with early notice about decisive changes in the sector that are critical as an investor.
But that’s not the only upside. With these ongoing discussions, I have also significantly improved my access to some of the most important energy figures on the planet.
When the details are finalized, I promise to fill you in.
But it’s another matter entirely that has my attention at the moment…
That’s because it looks like the children inside the Beltway are about to start acting up again. This time their tantrums will impact energy prices well beyond the U.S.
There is also another problem. We are rapidly sliding into another fiscal crisis because we actually never extricated ourselves from the last one.
Instead we delayed. And now it’s about to hit us square in the face. <<>>
In fact, in decades of working with these people, I have never witnessed the professional staffers who keep this ship afloat as pessimistic as they are today.
It’s easy to see why. With a 12% approval rating, Congress is its lowest point in history.
Of course, the partisan bickering has always been there. Yet, what distinguishes it today from years past is the complete lack of vision.
Each vote that comes to the floor is now regarded as a test of ideological purity. Each decision, even those that traditionally are considered procedural and of low impact, are now cast as crises votes.
The system is at loggerheads and the wheels of the democracy are grinding to a halt. That means a number of issues are about to come to a head.
And several of these will have pricing impacts in energy.
The View from Washington D.C.
As you might have guessed, our meetings so far have covered a wide range of issues. They include the primary concerns of those interested in investing in – and making money from – oil and gas.
Today, I will comment on two of these concerns but rest assured we will be visiting the others later.
Each has both a domestic and an international market cost. But each will also provide their fair share of opportunities as well.
The problem is the dysfunctional condition of Congress makes the situation even more tenuous.
First, having failed miserably in designing a Farm Bill (something the legislative art of “you scratch my back, I scratch yours” used to accomplish with ease), Congress is now going cause a related onslaught in gasoline.
This one is certain to raise prices for gasoline but not refinery profits. Statutes already mandate that 10% of auto fuel be ethanol, but that figure is now increasing to 15%.
Forget for a moment that many car engines cannot take the 15% mixture, or that the energy output from ethanol averages only 84% of what you get from gasoline, or the dislocation created for other uses of corn in the economy (and a broad rise in other prices). The problem I want to focus on is the impact on price at the pump.
Mandating a set amount of ethanol guarantees an increase in pass through prices when the cost of that ethanol is accelerating. And that is a direct result of one of the worst droughts in recent memory.
Corn crops may be improving, but it will take a while for that to reverberate throughout the market. And even then, the mandated rise in ethanol use for fuel will offset it.
Refineries pass that added cost along to consumers, increasing the retail price, but are not profiting from it. From an investment standpoint, that is a double whammy if there ever was one.
Meanwhile, the situation is not any better on the production side either.
Ethanol is already becoming a less profitable use for corn. Unfortunately, the mandates also require corn producers to continue to produce. Only in a place like Washington would any of this make sense.
That leaves us with the likelihood that gasoline prices are headed higher in the near-term-not lower.
Time to Talk About the Keystone Pipeline–Again
The second development is that the Keystone XL crude oil pipeline from Canada is back on the front burner again. And now the White House is beginning to question how much new employment the project would create.
Since the pipeline crosses an international border, the U.S. Department of State needs to sign off. The means approval of the pipeline is now in the hands of the Obama administration– not the legislature.
In the meantime, the domestic sections of the project are already underway. These are primarily designed to relieve the pressure at the main Cushing, OK pipeline interchange by moving crude south to the Gulf Coast refineries.
Nonetheless, Congress could actually do the right thing in the short-term by facilitating the movement of Canadian oil to the U.S. by another means.
As I wrote last week, we are about to experience a major increase in Canadian crude shipments via railroad. That can be accomplished quicker and much less expensively than building a multi-year, multi-billion dollar (and politically contentious) pipeline project.
To expedite the rail process, Congress should enact enabling legislation for terminals, transfer points, and interstate track usage. Unfortunately, there has been no movement on any of these fronts either.
The initial stages are nonetheless underway with the private sector carrying the mail for the time being. As I discussed last week, I’ll soon have much more to say about these development are going to open up profits for retail investors as well.
Meanwhile, we’ll just need to continue developing these investment opportunities without expecting much help from Congress.
In just two days, the national legislature will close down for 52 of the next 61 days. Congress is now set to take the entire month of August off before coming back for a grueling nine sessions in September. That’s it folks.
Who would have thought that we would see the day when the clowns controlled the entire circus?