3 Huge Energy Myths and How You Can Profit
The hardest part of making any decision -- investment or otherwise -- is having the right facts.
And if you rely on conventional wisdom for your investment decisions, you're often basing your decision on merely the most widespread myths, rather than sound information. As one of my Foolish colleagues says, conventional wisdom is long on convention and short on wisdom.
To make money in the market, you need to avoid the myths that only seem true and focus on the facts that can make you money. Perhaps in no other sector are myths more pervasive than in energy. Here are three biggies from the blog Sober Look and my take on what it means for investors.
Myth No. 1 -- The U.S. imports a majority of its oil from the Middle East
The way politicians howl about oil imports, you would think the U.S. owed three kidneys and a liver to Mideast oil despots. But as you can see below in the chart of the top 10 sources for U.S. oil, the U.S. produces about half of its own oil, while it imports the most from Canada, according to the Energy Information Administration.
Saudi Arabia still comes in at a strong 8% of total U.S. oil use, but the only other Mideast country in the top group is Iraq, at a meager 2%. Where's the outrage at Canada for shipping us oil?
With some of the largest oil companies in the world, in the form of ExxonMobil and Chevron, the U.S. is still the third-largest producer of oil, behind Russia and Saudi Arabia. Those companies have prospered with the advent of $100 oil and will continue to do so as the world's voracious appetite for oil grows and prices soar.
Source: U.S. Department of Energy.
Still, despite producing half of its oil, the U.S. imported some $280 billion of oil from January to October 2011, making it the world's largest importer of oil, according to a recent Associated Press report.
Myth No. 2 -- U.S. domestic oil and gas production continues to dwindle
Again, not true. As oil prices continued to rise over the last decade, formerly unprofitable sources of oil in the U.S. became viable energy plays. Those new sources include the shales of North Dakota, Montana, and Texas, among others. Chesapeake Energy and SandRidge Energy (NYS: SD) have huge footholds in such unconventional resources.
According to Eurasia Review, the rising price of oil and those new sources helped reduce U.S. dependence on foreign oil from about 60% of consumption in 2005 to less than half now. In fact, some analysts think these unconventional sources could make the U.S. the world's largest oil producer again.
For income seekers in energy, SandRidge has spun off assets to SandRidge Mississippian TrustI (NYS: SDT) . The trust had its IPO in April and has already been distributing higher-than-expected payouts. But if you're looking for a dividend payer with more experience under its belt, you might consider BP Prudhoe Bay Royalty Trust (NYS: BPT) , this millennium's best dividend performer. Please note that most trusts are depleting assets with finite lifetimes, so the dividend will stop at some point.
And domestic natural gas production continues to grow, too. In shales across the U.S., formerly inaccessible natural gas can now be drilled economically. According to the EIA, shale gas production has moved up incredibly, growing 47% in 2009, and shale gas reserves skyrocketed 76%. Chesapeake and SandRidge are involved here, as well.
Gas offers another good advantage. Because of its geographic dispersion (relative to oil) and location in politically stable areas, gas is more suitable for energy security. That means you needn't turn to more risky companies such as Hyperdynamics (ASE: HDY) , an exploration-stage company in offshore Guinea that just reported higher-than-expected drilling costs and is plagued by operational problems. Domestic plays such as SandRidge and Ultra Petroleum can still offer solid upside.
Myth No. 3 -- The U.S. does not export energy because of a lack of energy resources
While the U.S. is still a net importer of energy, it does export significant energy, and that amount has been climbing rapidly in the past few years.
In fact, for the first time ever, in 2011, America's top export was fuel. That's a big shift, since just 10 years ago, fuel didn't even number among the top 25 exports. Over the last five years, the exports list was topped by aircraft.
That's striking, but even more so is the fact that 2011 was the first year since 1949 that the U.S. was a net exporter of fuel, according to an AP report. Annual fuel exports were worth some $88 billion. That's being driven by (1) lower U.S. consumption due to a sluggish economy and more efficient vehicles, allowing refiners to export their surplus, and (2) higher prices, which make those exports worth more.
America's cheap and plentiful natural gas has also given well-positioned companies the ability to export. CheniereEnergy (ASE: LNG) and subsidiary Cheniere Energy Partners are planning a liquefied natural gas export facility on the Gulf of Mexico to begin operation in 2015, although they're still working through how to finance it. But the parent company has already signed multiyear export deals.
Foolish bottom line
It's important (and profitable) to get away from the myths that dominate so much of the popular discussion about energy and get down into the real information that can make you money. Our analysts have prepared a special free report that highlights one dominant energy company positioned to excel across the globe. We call it "The One Energy Stock You'll Ever Need," and you can get instant access to the name of this company for free -- just click here.
At the time this article was published Jim Royal, Ph.D., does not own shares of any company mentioned here. The Motley Fool owns shares of Ultra Petroleum. Motley Fool newsletter services have recommended buying shares of Ultra Petroleum and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.