The current downtrend in pump gas prices is nothing more than an old fashioned gas war. Those of you young enough remember gas wars where gas stations would compete for having the lower price and in the end all gas stations got hurt selling below cost. We actually have bought gas in a gas war at 19 cents per gallon. In this case however it involves large companies, even larger countries, and much much higher stakes. Let's take a look at the winners and losers and where one might find some profits from this new oil order.
Remember the "peak oil" theory tossed out there by everyone from those trying to make a buck on short sighted investors to those who actually created it and championed by the democrat party for the purpose of pushing so called renewables, solar, and wind energy sources. Well we now know that peak oil was a hoax. Best guess now we have tapped about 30% of the possible sources of current oil and gas energy. Furthermore many oil people now think oil and gas come from deep in the earth where it is very hot and the blow off of that heap is seeping crude and gas up through the mantle and then the earth's crust. Here is something you likely do not know there is more, tons more, crude oil seeping naturally out of the earth's crust into the ocean than could ever be spilled by any oil company well leakage on an annual basis. Simply put we have more oil than we need and we will never run out for all intents and purposes.
Fact is we are living in a oil world that started with Ronald Reagan. That old "supply side" idea of if the capitalists get incentive enough they will produce more oil that demand could ever demand and prices will come down. Bingo! Everyone in the oil industry knew there was barrels and barrels of oil underneath America to get if someone could find a way. Someone found a way, with enough incentive being $80 plus barrels of oil. Not to get into the details here, but fracking and lesser know horizontal drilling, has produced a bonanza of energy for the US at a cost of around $55 to $60 per barrel here. Mostly in North Dakota and West Texas. In the last couple of years all that new oil has come to the market and driven the price down due to the glut. Oh, and remember those who said "drill baby drill" would not produce more oil, well they owe us an apology for their outright lies. So here we sit with a world oil glut and frankly it is going to be with us a good number of decades if the oil people are left alone to do their thing. Goes to show a cartel, like OPEC, can only last so long world where at least one country has a free market. Note one more thing only in the US do you see new oil being extracted, not Europe, not China, and certainly not Russia, no where else because of the incentives at play here and not in other non free market countries.
Now who are the winners and losers? Simply put Russia, Venezuela, Iran, and Mexico are right now the losers. In the case of the first three countries the NEED for higher priced oil is to keep the country afloat financially. Russia being a gas station masquerading as a real country gets hurts worse since they are in a real bind since they are the world's largest producer. Venezuela and it's restless population can not survive as a country without higher priced oil. Lastly Iran is a high cost producer and this current price hurts them badly cash flow wise. Honestly Saudia Arabia which can produce oil in the $20 to $30 a barrel range knows all this and wants these three countries to suffer geo-politically. Saudia Arabia also wants to drive the new US drillers into bankruptcy. We will get to Mexico in a moment.
So the current scenario is hurting US fracking and horizontal drilling producers. However they have one advantage none of the other producers have in that the United States government in not in essence running and owning the oil companies. Most of these countries are de facto in ownership of the "oil company" doing the drilling and oil sales. So unlike the US there is no incentive to find ways to drive costs down and squeeze vendors. Trust me that is happening righ now in the US oil fields and in a year or two when it really matters they will be able to produce the same oil at a even cheaper price per barrel than the current $55. Mexico has begun selling off their state owned oil company and one can expect once the free market people get a chance at their oil resources they will begin producing at a lower market based price. Canada too has huge resources of oil and they will find ways to produce at a lower price given the incentive here. In all North American will be energy independent if the capitalists are left alone to do their thing. Now how low Saudia Arabia wants to drive the price per barrel down is an unknown, but even they have their tipping point with a restless population hooked on lots of free stuff from oil revenues. So as we said at the start we have a gas war, which will end eventually, and as in all wars the suppliers in the end win.
Who are the suppliers we like best? Let's start with one we like long term, Haliburton symbol HAL, who is a primary oil field servicier in the world when it comes to specialized services. HAL will be merging with Baker Hughes next year in a deal just announced and they will find cost savings there. HAL has sold off significantly and we think way too much here at $40. It carries a single digit PE too. Oil majors will also win since they are multi-faceted businesses ranging from drilling to selling at the pump. Chevron, symbol CVX, is a darn good pick here having sold off a good bit. Exxon is always a good pick if one thinks safety. However we really really like BP, symbol BP, which carries a nice 6% dividend along with an already substantial upside already due to the Gulf oil incident. We recently bought BP, after they sold off last week, and HAL and might add more. Since we know there is a point where the gas wars end and anyone who buys when there is blood in the streets value wise gets rewarded. Might add CVX as well. CVX and even Conoco Phillips, symbol COP, carry a very safe 4% dividend for those seeking yield.
So pick your spots and add some oil stock selectionsknowing there is an end to the new fashioned gas wars.
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