(I know I've promised a follow-up to Monday's piece on Integrated oil stocks -- they're not going away and the President's speech today struck me as far more timely. I promise to finish the series for you in this coming Monday's submission ... you won't miss anything, I promise!)
President Barack Obama's energy trip is politically tangled, and for good reason. Gas prices are the most potent political weapon in the Republican arsenal right now and the White House seems to know it.
The president has made three speeches in the last month on energy prices and policy and is now finishing up his latest three-day energy tour in Cushing, Oklahoma. The question is whether any positive action will emerge from all this talk and help either a short-term gas price problem or a longer-term misshapen energy policy plan and anything we can profitably invest in?
The quick answer is most likely no. The recent inspiration for the president to talk so often about energy these days is political and not a plan to create a long-range integrated energy policy into his platform. But today, he will walk back the politically-inspired permit halt of Keystone XL, that pipeline propsed by TransCanada to increase the flow of oil sands from the Athabasca to the Gulf coast. By appearing in Cushing, the site of the elbow between the top and bottom half of the proposed pipe and by expediting the permits for building this southern portion, the president is clearly signaling that he won't get in the way of the latest permit process, resubmitted by TransCanada this month.
Keystone XL will be built, whether or not the president wins reelection.
Not that the building of Keystone XL will have any noticeable effect on gas prices. The United States is a net exporter of gasoline, our demand is down to levels not seen in 12 years, our domestic production continues to grow and is now up 1.5 million barrels since 2007 and our imports of foreign oil are down 5 million barrels a day. Want more? OK, our cars are more efficient than they've ever been and getting more miles per gallon by the month, our total miles driven are dropping and even small increases in the number of electric vehicles are helping a bit.
So, why are we stuck with high gas prices? One reason is that the United States is tethered to a (self-created) global oil market, where we collectively generate a single price for a barrel of oil. Except for the massive financial disconnect in Cushing, where the president is speaking today, global oil prices are basis-priced on North Sea Brent oil, not the West Texas Intermediate grade traded at my old home, the NYMEX.
To put it as simply as possible, the US consumer is paying for the oil that the Chinese and Indians are increasingly using. Emerging market growth is helping to drive prices higher and the US is also captive to that global energy demand increase.
And here lies a solution. If you are tethered to a global market for your gasoline price, one way to help yourself is to get out of that market and get to a local market instead.
Natural gas IS that market.
Here in the US, nat gas is pricing at $2.35/mmBTU, while it is pricing at $9-13/mmBTU is Europe and even more in Japan. Because nat gas isn't easily stored and transported, it trades locally instead of globally and creates some astounding price differences. The United States has entirely missed the opportunity to capitalize on this disconnect up to now.
But maybe, just maybe, the president will see that nat gas provides the cornerstone to a new US energy policy that will also get him out of the political fix he's in. One way to do that almost immediately is by again forcefully pushing the nat gas act, the subsidies for truck engines and fueling stations that failed recently to be included in the highway funding bill.
Mostly it was Republican senators that voted against that bill and it would be a political turnaround to ask them publicly why, when nat gas is domestic, cheap and greener than oil.
If Obama finds and uses this strategy, there are a wealth of nat gas stocks that have been destroyed in the last three years that will suddenly find life: Devon (DVN), Chesapeake (CHK), Sandridge (SD), Encana (ECA) and Ultra petroleum (UPL) to name a few.
Maybe it would be a miracle in this political climate, but the upside potential of an advocated switch to natural gas would deliver some monster returns to these stocks. It's worth a try.