Energy: Security Vs. Independence

I nearly fell out of my chair before he had finished his sentence.

The last place I expected to hear this was a conference room.

On Monday morning, I found myself sitting around a table with about half a dozen other investors. We were there to listen to a small up-and-coming driller that was ready to move up in the world — or so they believed.

Although the company rep delivering the spiel didn’t look old enough to shave, I was willing to give him the benefit of the doubt that he knew what he was talking about.

But within the first five minutes, I was ready to leave.

Had the coffee been better, I might have had a reason to stay. Sadly, it was about as stale as the rhetoric I was listening to, so I quietly made my exit after the first break.

Halfway down the hall, I realized I wasn’t alone…

At first, I couldn’t put a finger on where I had heard his speech before.

It dawned on me right around the point where the oil rep said (with a disturbing amount of confidence) that the United States could drill itself out of its dependence on oil imports.

What surprised me even more was seeing the heads around the conference room table nodding in agreement — all but one, who immediately started laughing.

This same investor followed me out the door and down the hall.

He clearly shared my skepticism, and there was no disguising his thick Texas accent when he spoke: “Pipe dreams and fantasies. That’s all I hear nowadays.”

“We shouldn’t laugh too hard at the poor kid,” I said. “He isn’t the first to think it’ll happen.”

He shook his head as he replied, “Don’t I know it.”

The Terrible Case of Peak Optimism

Rumor has it Nixon was walking down the halls of the White House early in his term when he suddenly began swearing. He had just been told, for the first time, that the United States could no longer produce as much oil as it was consuming.

A few years later, Nixon would unknowingly start the long-standing presidential tradition of reassuring the public that Uncle Sam was on the road to energy independence with his statement to the public:

What I have called Project Independence 1980 is a series of plans and goals to set to insure that by the end of this decade, Americans will not have to rely on any source of energy beyond our own.

Unfortunately, Nixon’s optimism has become a rite of passage for politicians.

In 1975, President Ford set much less ambitious goal for energy independence: to lower oil imports by two million barrels per day within three years.

By the time Carter took oath, oil imports had increased by almost three million barrels per day.

Of course, his promise that the nation would never use more foreign oil than it did in 1977 started on the right track. Unfortunately, it didn’t last very long:

More than 38 years later, I’m hearing the exact same plan for U.S. energy security being touted.

The only difference — which I discovered on Monday morning in that conference room — is that it’s not just the politicians who believe this will still happen…

But let’s ponder what exactly it would take for this independence to take place.

For starters, the United States would have to literally double its current oil production. That means we need to find the equivalent of five more states like Texas, our largest oil-producing state.

We need to take into consideration the time it would take to develop those fields. After all, it took nearly a decade for the Prudhoe Bay field to start production following its discovery in 1968. Production peaked two years later at 1.5 million bbls/d.

The bottom line is it’s simply not going to happen, no matter how much drilling takes place.

So instead of promising the impossible, we should look elsewhere for our nation’s energy security.

I’ll give you a hint: It’s not going to come from the 4.3 million barrels OPEC sends our way on a daily basis.

Taking Control of Your Oil Investments

With that in mind, there is a way investors are able to sidestep the political rhetoric and take direct control of action.

About two weeks ago, I mentioned how we can replace our oil imports from two of our largest OPEC suppliers from just one place. As it turns out, we’ll be replacing a lot more than that within the next few years.

Trust me, it’s not the major oil and gas players that are on the top of the list; major players like Exxon are actually looking for the exact same companies.

It pays to take a closer look at the smaller producers that have the land under foot and the money to drill…

Until next time,

Keith Kohl
Editor, Energy and Capital