A whole lot of pundits are quite irate about the prices at the pump, and they’re blaming it on oil companies. I think this is misplaced — the anger here should be focused more on the U.S. dollar than the oil industry.
For starters, the pricing of oil is in U.S. dollars. That means if the dollar drops 30%, the price of crude oil will rise 30% since crude oil is priced in U.S. dollars.
What’s hurting America’s currency right now? It’s not Big Oil, but rather it’s the Fed’s 0% interest rate policy. This is undermining the U.S. dollar, especially relative to other countries that have high interest rates, since it makes those currencies appreciate relative to the U.S. dollar.
There are other reasons for high oil prices:
- The tension between Iran and the West is turning into a big game of chicken as the world waits to see if Iran will blink.
- Supply disruptions of light sweet crude oil from political unrest in South Sudan, Yemen.
- Libya is not back up to its original production before its civil war, keeping the upward pressure on Brent sweet crude, keeping many Asian buyers of sweet crude scrambling.
Plus, the demand for crude oil rises during the summer months, so no price relief is likely until global demand turns down in the fall when seasonal demand ebbs. Naturally, the prices at the pump are now a big political issue, especially since this is a Presidential election year, so high gasoline prices will likely remain in the news for the next several months.
Furthermore, a common misconception is that more oil means more gas. That’s not necessarily true.
The production of crude oil is rising in the U.S., and the exports of refined products are now at a 62-year high. But the reality is that the “refined products” include more than just gasoline, and a smaller portion than you think is actually going into your car’s gas tank.
The truth of the matter is when you refine a barrel of oil, you can’t just order up 100% gasoline. In fact out of a 42 gallon “barrel” of oil, you’ll only get 20 gallons of gas. The rest is turned into about ten gallons of diesel, four gallons of jet fuel and two gallons of heating oil, with the remainder turned into other miscellaneous petroleum products.
So about 50% of a barrel of oil is turned into gasoline, and 25% is refined into diesel.
However, we don’t actually use all that much diesel in the U.S. — but they certainly use a lot in Europe — that’s why it gets exported. As a result, even though North America is awash in crude oil and refined products, oil companies have to send a lot of that diesel overseas.
So as you can see, there’s a lot more at play at the pump than Big Oil largess.
For investors looking to play the rise in gasoline and oil prices, I recommend these three strong refinery stocks:
Other energy companies that are poised to profit from higher energy prices include: