“If energy is going to be used as a weapon, we need to have the largest arsenal.”
Former Texas governor Rick Perry said this last Tuesday at a conference in Houston.
He was referencing the clout of OPEC within the global oil trade and the fact that the U.S., as of right now, is beholden to the whims of the group.
Rick Perry, a likely presidential candidate, offers a seemingly simple solution: Lift the oil export ban.
He characterized the isolationism of U.S. oil as an “error” and went on to suggest that if he were president, the ban would be lifted.
Although Perry is a politician who, aiming for the Oval Office, is desperate for a platform that’ll help him stand out from the already bloated listed of potential Republican candidates, he does have a point.
While I hate to indulge the posturing of politicos, Perry joins a debate that has plenty of commentators and ramifications.
So are oil exports the answer to the problems of investors?
The situation is complicated, but if done properly, a lifting of the ban could pay huge dividends, not just for investors but for the entire North American energy industry.
Of course, the reverse is true if exports are mismanaged — a strong possibility with pending deregulation around the corner…
With oil prices low, U.S. drillers need any cost advantage they can get to stay in business, and if oil exports are legalized, the price relief could give North America a stronger grip on the global industry.
Low Oil, Middle East Turmoil
For the last few years, before the crude oil bear market, the argument for exports was that U.S. drillers were producing light, sweet oil, but most of our refinery capacity is designed for heavy, sour crudes.
Because of this, it made sense to export some of the lighter oil to displace it with heavier crude, thus balancing refineries — that and it’s always good for the economy to have more exports than imports.
However, with oil teetering near six-year lows for most of 2015, the argument has changed…
The chart above shows the price per barrel for WTI (the black line) and Brent crude (the green line), and as it shows, Brent trades about $4 higher than WTI.
This means U.S. producers would find a price advantage per barrel if exports were allowed again. Even though this advantage would be small, when oil prices take a 50% haircut in seven months, every dollar counts that much more.
Beyond the cost advantage, U.S. oil exports would greatly benefit our allies, who are at risk of shortages and supply squeezes because of turmoil in the Middle East.
As you probably saw last week, Saudi Arabia and Egypt are using military force to quell a rebellion in Yemen, while the U.S. and Iran (yes, that Iran) team up against ISIS militants in Iraq and Syria. Plus, Libya has been in a civil war since 2011.
The escalation of violence in the region wrests the oil market out of the hands of the big OPEC producers ever so slightly.
But as you’ll notice in the chart above, oil prices spiked last week once news broke that Saudi Arabia launched airstrikes in Yemen.
And the freeing of U.S. oil into a more competitive global market would benefit U.S. drillers and allies as they search for a stable provider.
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U.S. Oil Export IPO
The problem here is that if the export ban is lifted, the opportunity for mismanagement by the powers that be is huge.
The government could cause damage by legalizing exports without placing a cap on the number of barrels. Without a cap, U.S. oil would flood the market and drive prices even lower, while too strict of a cap would make the cost of exports greater than the benefit.
Or (and this is the more likely scenario) the government could take its time granting permits to potential exporters. In doing so, the first companies to be allowed to export would have a monopoly.
This is plainly obvious when you look at Pioneer Natural Resources and Enterprise Products Partners and their government-sanctioned monopoly over condensate exports.
Because of these risks, I like to think of investing in potential oil exports like I think of investing in a sexy new IPO: Investors should proceed with caution.
Recently, all of the big-name IPOs to hit the market have ballooned well above their value only to crash down a few months later.
Instead of pouring your hopes and hard-earned dollars into a potential export candidate or a driller with enough production to ship oil abroad, I have a safer suggestion.
Exports, if approved, will lift all boats. The best way to invest is to stick with a strong company that boasts a long history of profitability and stable income.
One sect of the oil industry fits these criteria and will be instrumental in oil exports.
Good Investing,
Alex Martinelli
With an eye squarely focused on the long-term, Alex Martinelli takes the art of income investing to a higher level within the energy sector. His research has helped hundreds of thousands of individual investors identify well established companies that have a long history of paying out dividends to their shareholders. For more info on Alex, check out his editor’s page.
