Is The U.S. To Become A Net Energy Exporter?

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Includes: BNO, CRUD, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Vulcan Investments

Originally published on Sept. 4, 2014

Beginning in 1859, when the first oil well began production in Titusville, Pennsylvania, the U.S. has been intricately involved in the global energy market. First as a net producer and then as a net consumer in the 1970s, and now potentially a net producer once again. Five years ago the idea of the U.S. becoming a net exporter of energy was unthinkable. In fact, the theory of "Peak Oil" was viewed as a reality. There was a genuine concern around the globe that the world was running out of recoverable oil and gas meaning that energy would be extremely expensive moving forward.

Shortly after U.S. oil production peaked in 1970 to almost 10 million barrels per day, several Arab nations, known collectively as OPEC, introduced an oil embargo in 1973. The result of the embargo was soaring world oil prices. In an attempt to limit U.S. exposure to the global crude oil markets, lawmakers in the U.S. enacted various conservation measures along with restrictions on exports. The idea was to keep domestically produced oil on American soil and limit the nation's reliance on international imports. While it's debatable as to whether or not these measures had any benefit on the domestic economy, one thing is clear - the export restrictions, which are currently still on the law books, are outdated and no longer economically useful.

U.S. oil production bottomed in 2008 at 5 million barrels per day but is now producing levels of crude oil not seen in 25 years. In March 2014, America was once again producing 8 million barrels of crude oil per day along with 2.6 trillion cubic feet of natural gas every month. What changed in 5 short years? In a word: 'Fracking'.

Fracking, the process of shooting steam and chemicals into shale rock formations to unlock energy sources formerly thought to be unattainable, began to develop in the late 1940s. Despite its long term use, the potential of this process wasn't truly realized until recently when new technologies such as horizontal drilling were introduced.

In response to the U.S.'s new found glut of fossil fuels, calls to remove current export bans are increasing. In recent days South Korea and Mexico have joined the EU in pressing the case for the U.S. to ship oil overseas. U.S. exports would provide allies with a reliable energy partner and with tensions rising with Russia it can't come soon enough for those dependent on the former Soviet bloc for their energy needs. Of course U.S. oil drillers and shippers are also stepping up pressure for the government to eliminate - or at least loosen - the bans imposed.

Partly in response to the increased pressure, the Obama administration has cleared the way for unrefined American oil exports. The Commerce Department granted permission to two U.S. companies to ship an ultralight oil known as "condensate" to foreign buyers. The condensate can be refined into diesel, gasoline, and jet fuel. The approval was given directly to two companies at their request and will likely encourage additional companies to make similar requests. The disparity between U.S. oil prices (WTI), currently at $94.21 per barrel, and foreign oil prices (Brent), currently at $101.53 per barrel, provides the opportunity for domestic producers to earn higher income by selling that oil abroad.

There are currently 20 proposed refining projects that would have a combined capacity of over 900,000 barrels a day of the condensate. This capacity is able to come online under current regulations and provides investment opportunities and jobs growth in this particular sector. There is also a high level of expectation that the ban on crude oil will eventually be lifted altogether in which case the available crude for export is limited only by the economics of supply and demand.

As mentioned earlier crude oil is not the only natural resource benefiting from the new technologies being employed. In addition to the extraordinary reversal in U.S. oil production, natural gas production has also seen a huge increase in recent years. The U.S. is now producing over 25 trillion cubic feet of gas annually, a 30% increase since 2008, and projected to rise above 30 trillion cubic feet by 2040.

This massive increase in natural gas production has devastated the price of the commodity here in the U.S., currently trading at $3.91 per Btu down from an all-time high price of $15.35 per Btu in December 2005. Compare today's low price to current international prices (reaching above $15.00 per Btu in Japan) and you can again see that this discrepancy provides significant opportunity for U.S. producers.

While there are no bans on exporting natural gas from the U.S., there are currently no facilities to do so either. Based on our historical need to import the commodity, the only terminals in the U.S. for liquid natural gas (LNG) are import terminals. This trend is changing however. There are currently 3 approved LNG export facilities in the U.S. under construction and an additional 14 proposed facilities at different levels of the approval process.

All in all, with the likelihood of the U.S. becoming a net exporter of energy resources in the coming years, there are many investment opportunities for those following the trend. In addition to direct investment in those industries, massive job creation and infrastructure development in response to the changing trend will contribute significantly to the slowly recovering economy. The American economy is faced with challenges known and unknown at all times. For now our energy industry is no longer a hindrance to economic growth but an important asset for that growth.

This article contains the opinions of the author but not necessarily the opinions of Vulcan Investments, LLC. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.