Prosperity Dispatch – Why Obama’s Energy Plan Will Push Oil Prices Much Higher
It has been described as a “stunning” reversal.
In reality though, the “reversal” is actually cementing one of the greatest investment opportunities of the next decade.
Last Wednesday the government announced it was opening up offshore waters to oil drilling and exploration.
It was hailed as great news by most of the media. The move to open new areas to oil exploration when oil’s at $80 a barrel appeared to be a great economic move and a greater political move.
But not all is what it seems. And a great investment opportunity was just turned into a greater one.
————————Special Offer————————
Enjoy our premium content for up to 60% off!That’s ONLY $1.60 a day for great advisory content that actually produces!
CLICK HERE to take advantage of this exciting offer
——————————————————————-
Any Impact is 15 Years Away
In the hours that followed the announcement, an increasingly skeptical public wanted to know the details of the plan. As the details came out, the announcement’s context made a lot more sense.
You see, the policy “reversal” actually closes off more areas than it opens up.
Yes, offshore blocks in Florida and Virginia were opened up to exploration. But almost all of Alaska, a huge part of the Gulf of Mexico, and the entire Pacific Coast were all taken off the table.
On top of that, the new policy adds more red tape to the oil exploration industry. For example, the Department of the Interior (DOI) has to complete environmental studies on all the new offshore areas before any drilling can being. Those can and will take years to complete.
The government will also be in charge of completing the seismic surveys of the areas. They will likely move at a pace consistent you’d expect from the government. And the results produced may or may not be helpful to the oil industry. So it’s likely a couple years of seismic research will likely have to be recompleted by the oil industry.
Then there’s the auction process after that which can take months to years to complete.
And it’s pretty safe to expect scores of lawsuits which will delay any real exploration work can begin. The environmentalists are already laying the groundwork. While researching this article, I came across an environmentalist’s article claiming “Obama’s Disastrous Offshore Drilling Plan Dooms Polar Bears.”
At this point, we expect it to be at least 10 years before a single exploration well is drilled in these newly opened up areas of offshore exploration. Then, if a discovery is made, any oil production will be at least five years after that due to more environmental studies, other research, engineering, and infrastructure construction.
So although the mainstream media got all excited, a rationale look at the announcement reveals any positive impact from it is at least 15 years away.
In the end though, this is all part of the current administration’s strategy.
Right on Schedule: Obama’s Energy Strategy Revealed
Most of the public may have been fooled, Mr. Market saw right through the announcement.
Since the announcement oil prices have been steadily climbing. After being stalled for nearly a month between $78 and $82 a barrel, the announcement had successfully propelled oil out of that range and to an 18-month high.
A barrel of oil now trades for nearly $85 a barrel and the short-term is very bright. But the long-term outlook is even brighter. Here’s why.
A little over a year ago, we laid out what we saw as the administration’s real energy strategy. And right now it’s right on schedule.
In Could Obama Push Oil to $300 a Barrel we noted what was coming:
1) Tax oil companies so they make less money and marginal oil projects become less economical.
2) Increase fees, royalties, and bureaucracy to reduce exploration and development.
3) Add a “cap and trade” carbon emissions program to add an extra cost to all fossil fuel energy producers.
The first step was initiated last year. Although it seems mostly forgotten, all of those tax hikes are still in place. Also, on a local level, oil-producing states are quickly turning to oil companies to help fill their own budget gaps.
The second step is in progress right now. This week’s announcement was just the high-profile part. Earlier in March in Montana a federal judge approved the suspension of 61 oil leases which cover more than 39,000 acres of prospective oil production property. The suspension is in effect until the Bureau of Land Management (a division of DOI) can complete a series of environmental studies.
$200 Oil: As Easy as One, Two, Three
The third step, establish a cap and trade scheme, is clearly up next. This week’s announcement will likely be positioned as an attempt to “meet you half way” by the Democrats and lay the foundation for another “we tried to compromise” justification for enacting another unpopular policy.
Although this is clearly a politically unpopular move, there will be a time at the end of November when the U.S. Congress is a lame-duck majority. All of the representatives that were voted out in the upcoming election will have no constituency to answer to and would be much more likely to stick with the party line.
We’re not helpless here. We can turn their mistake into our gain.
Where to Look For the Biggest Gains
Just like all other government intervention into the economy, there will be opportunities and pitfalls.
One of the more forgotten about opportunities is shaping up in ethanol. Although ethanol makes no sense economically, environmentally, and on energy efficiency, it is politically popular. That’s why we are going to keep a close eye on stocks like Pacific Ethanol (NASDAQ:PEIX).
Pacific ethanol shares are up more than 288% since their November lows and although the company will continue to face struggling times in the short-term, any increase in government subsidies could make it a big winner.
However, the safest and the most lucrative sector will likely be oil. Crude is still and will continue to be king.
Alternative energy sources like solar and geothermal are great ideas. None of them, however, are developed enough to replace a significant portion of oil consumption.
More importantly, there is just too much technological advancement on the horizon. So even though the sector could be facing years of exponential growth ahead, there’s no clear winner yet. It’s like Microsoft in the early 1980s. Sure, there was tremendous growth ahead for the software industry and everyone knew it. But there were dozens of companies with competing. Most of them disappeared along with the investors’ money that backed them early on.
In an upcoming Prosperity Dispatch, we’ll look at how to find the oil industry and which subsectors offer the greatest risk/reward potential. After all, when it comes to a bull market created by natural market forces and exacerbated by government intervention, taking advantage of it successfully comes down to correctly analyzing and managing risk and reward.
If oil’s going higher, and it is, we want to get all we can out of it.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
———-
PS – Don’t forget to explore our other free, daily content. Click Here to continue exploring our site
————————Special Offer————————
Don’t forget that you can enjoy our premium content for up to 60% off!ONLY $1.60 a day! That’s less than a latte, for great content!
CLICK HERE to take advantage of this exciting offer
——————————————————————-
Random Posts
The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
