We've all been hearing about all kinds of ominous developments, and certainly the last few weeks have not been fertile ground for optimism. I was, therefore, surprised on going through energy statistics when I discovered the powerful trend that has recently emerged in the United States economy: Oil imports are going down at a steady pace.
In order to get a picture of this, I compared the first two months of 2012 with the same two months of 2006; a year well before the recession. I wanted to be sure that the decline was not due to the recession, so I compared real GDP in the two time periods: Real GDP in the first quarter of 2012 was more than 5% higher than real GDP in the first quarter of 2006. All things being equal, one would assume that oil consumption and oil imports would be higher in 2012 in order to support a considerably larger economy.
In fact, oil imports have plummeted. Net imports of oil and refined products (total imports of crude and refined products minus exports of crude and refined products) have declined from 12.363 million barrels per day in January and February 2006 to 7.784 million barrels per day in the same two months of 2012. While net import figures are not available for more recent time periods, other data suggests that the trend is continuing. During this same time period, net imports from Canada have actually been increasing from 2.227 million barrels per day in 2006 to 2.639 barrels per day in 2012. As a result, net imports from the rest of the world ex Canada have been cut almost in half from 10.336 million barrels per day in 2006 to 5.567 million barrels per day in 2012.
There are a few complicated moving parts behind these numbers. There has been a huge increase (roughly a tripling) in the export of refined products from the United States. Apparently what has happened is that, as domestic demand for gasoline and distillate has declined, the U.S. refinery industry has more refinery capacity than is necessary for the U.S. market and is now refining crude oil in order to supply refined products to the export market. While total imports are down somewhat, net imports are down much more because of the large increase in exports of refined products.
Behind this trend are several key developments. Domestic oil production has increased more than 1 million barrels per day during this time period (this increase in domestic oil production is an important part of the increased real GDP during this time period). In addition, despite the fact that real GDP has increased, domestic consumption of petroleum and petroleum products has decreased by more than 3 million barrels per day during the same time period. This appears to be partly due to increased production of ethanol (which displaces gasoline), increased vehicle mileage (as more fuel efficient new cars enter the market), less driving, relatively warm winters, and some displacement of oil by natural gas in the heating and transportation markets. These trends seem to be continuing and, while we still import a tremendous amount of oil, the strategic and economic vulnerability of the United States to the world oil market may be on the decline.
What are the implications of this development for investors and for the country in general? First of all, it may produce a change in the nature of the business cycle. In the past, virtually every recession coincided with a run up in oil prices. Higher oil prices sucked dollars out of the U.S. economy and, at the same, created inflationary pressures which led to monetary tightening just as consumers had less money to spend because of higher gasoline prices. While U.S. gasoline prices will still be driven by world oil prices, a price increase will not suck as much money out of the domestic economy and will lead, instead, to a shifting around of wealth and economic activity within the United States (and its very economically integrated neighbor, Canada).
Secondly, national security policy may be subject to a change in emphasis. To the degree that the United States is less vulnerable to an interruption in oil imports, we may see the use of the Strategic Petroleum Reserve as a price stabilizer rather than a true strategic backstop. In addition, the United States may pursue other goals in Middle Eastern policy with more determination. Of course, other countries are importing more and more oil all the time and we may come to a point at which China becomes a major player in the Middle East.
Thirdly, there is a danger of complacency and drift and there may be pressure to relax some of the measures that have helped us solve the problem by imposing restrictions on domestic drilling or abandoning vehicle mileage standards.
Fourth and most importantly, I think that the trend illustrates the beginnings of a long-term displacement of petroleum by natural gas in the transportation market which will probably start in the more advanced economies. Natural gas has already displaced some 500,000 barrels of oil per month in the transportation market. This is a proverbial "drop in the bucket", but the trend is steady and powerful and companies like Clean Energy Fuels (CLNE) are poised to take advantage of the trend as it accelerates. Each economic recovery and expansion emphasizes certain sectors of the economy - tech in the 1990s, housing in the 2000s. It is likely that a renaissance in the U.S. energy industry will be an important part of any further leg up in the U.S. economy. Picking winners and losers within the industry is still difficult although the majors, including Exxon (XOM) and Conoco (COP), look very cheap at these price levels.