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Are Oil Stocks a Buy?



April 18, 2012 – Comments (0)

Board: The BMW Method

Author: PaulEngr

Do NOT equate the value of processed oil products to crude prices. There is a relation, but that's about it.

Guess what the major export category for the U.S. was in 2011? Energy. The trend has been growing over the last 10 years and finally tipped the scales in 2011.

The major components are coal, and more interestingly, refined oil products. Basically what is happening is that we've reduced our oil usage (reasons are not necessarily important) and so the refineries have excess capacity. Since prices and demand are very high in Asia and Europe, we're exporting like crazy. We're also doing this with coal as well. The net result on a local scale is that at a time when the price of gasoline should be historically quite low, due to the fact that the demand is now a "global" concern, we're paying essentially European prices minus the cost of shipping it. This situation will continue until/unless more refineries are built abroad to capitalize on the shipping cost differential at which point we should see our prices retreat, assuming all economic drivers remain the same (which of course they won't).

Keep in mind as well that the whole producer side of the equation is changing as well. 3 major refineries in the Delaware/New Jersey area are shutting down because they are going out of business. Their plants are old and can only process sweet light crudes (Texas, Saudi Arabia). Those crudes are in short supply and demand high prices. There is vastly more oil available however in heavy/sour crudes which currently primarily come from Venezuela and Canada. What's interesting especially with Canada is that using CURRENT technology alone they have almost as much reserves as Saudi Arabia. This is about 3% of the oil sands available where it is convenient and close to the surface. If the in situ techniques which have already been shown to be effective are developed, the other 97% of the total oil sands formation becomes available and at that point, Canada has more oil than the rest of the world. And the political climate is much more stable.

That's with the oil sands business. This does not count the various deep ocean operations including the huge deposit discovered off the coast of Brazil, nor does it consider coal and natural gas liquefaction. At this point arguments about "fracking" aside, shale gas is here to stay and we're having something of a natural gas renaissance. I don't think I thought I'd ever see $2/DT natural gas in my lifetime, let alone anything below $10 but here we are with a real chance that $2 will happen this year.

The economic drivers alone, never mind the political ones, are causing fixed production operations to shift rapidly from both coal and oil over to natural gas wherever this is practical.

Transportation is the one sore spot with everyone. The inherent problem is a problem of density, specifically energy density. When it comes to vehicles, both weight and volume matter a great deal in terms of efficiency. I believe that eventually there will be a breakthrough somewhere and the transportation business will get "upended" but it's too early to tell where this will happen. There have been lots of attempts to displace gasoline and diesel but so far all of them fail in one fashion or another.

What if the transportation issue is ever solved and gasoline/diesel fall out of favor? Hold on a second...oil is not dead (actually, it is dead ocean life). It is still very useful for lubricants, and the bottoms are the founding material for the entire polymer industry. Although you can easily by corn starch-based plastics as well as make monomers from plant polymers, as of right now the cost differential is substantial and for the foreseeable future, bioplastics remain a niche market. The largest market fraction is using corn starch based plastic to make soluble drug capsules.

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