Despite the previous woes of the American energy industry, there is a wave of optimism around the production of domestic energy. We may have a long way to go before we can consider ourselves energy independent, but we’re heading in the right direction.
Whenever times are getting better, it’s easy to get caught up in hyperbolic rhetoric. Mostly because we want things like $2.50 a gallon gas and for the country to be a net exporter of oil. Unfortunately, we need to take a step back and realize there are some things that are just not going to change. Here are three things that will still happen no matter how strong the U.S. energy resurgence may be.
Oil prices will still go up
For those of you who were holding out for the potential of gasoline costing less than $2.50 a gallon, I’m sorry but that’s just not going to happen. Yes, American production has increased to its highest level since 1985 and, yes, oil consumption has gone down 11% from its high in 2005. But, we need to keep in mind that oil is a global commodity and the U.S. is only one part of the equation.
Source: U.S. Energy Information Agency, authors’ calculations
To a certain degree, prices are dictated by how much the weakest links are willing to pay for oil. In this case we have China and India, two booming economies with less than 1.3% of the worlds total petroleum reserves combined. Skyrocketing demand and lagging domestic production have vaulted China and India to numbers one and four in total oil imports, respectively.
As much as we like to believe that American companies would not let foreign demand drive domestic prices, ask yourself this question: If you were a major manufacturer and saw that your product commanded a much higher price overseas than domestically, then you would probably sell to that market, right? The same can be said for oil. Refining specialist Phillips 66 (NYSE:PSX) currently aims to export about 375,000 barrels per day of finished products from its refineries across the U.S. because there is much greater opportunity in markets overseas.
U.S. imports will never go away
At the peak of U.S. oil imports in 2005, we were importing from 86 different countries. The varying characteristics of all these different types of oil made American refineries extremely adept at processing crude. In particular, refineries in the Gulf of Mexico have become particularly good at refining heavy, sour crudes from Venezuela and Mexico. Valero Energy Corporation (NYSE:VLO) , the largest independent Gulf Coast refiner with a capacity of 1.7 million barrels per day, sources over 53% of its Gulf Coast refining capacity from heavy, sour crudes.
