It’s tough going for American drivers these days. The cost to fill up our tanks seems to be rising exponentially. According to AAA, the average price of regular gasoline is more than $3.80 per gallon, and some analysts predict we’ll eclipse the $4 mark before the start of the busiest driving season. I personally paid $3.89 this morning.
But while political tensions in Iran and speculators have a part to play in the ongoing saga, they are not the only culprits.
Energy prices ultimately come down to infrastructure and logistics. A lack of pipelines and refining facilities compounds any geopolitical issues. This helps explain why gasoline is cheaper in the middle of the country than the northeast. For example, consumers in Wyoming are paying around $3.30 per gallon, versus $3.99 in Connecticut. And this continued pipeline inadequacy will continue to boost prices for drivers in the East.
However, not all is lost. For investors, playing the potential fixes to this problem could put enough green in their tank to cover rising gas costs — and then some.
It’s All About Infrastructure
Europe’s bitterly cold weather and various tensions in Iran and Syria have set the stage for short-term spikes in oil prices. Couple this with rising demand from emerging nations like China, and you have a recipe for sustained higher prices.
However, supplies in the U.S. remain relatively high. The hydraulic fracturing (or fracking) revolution has not only increased supplies of natural gas, but shale oil as well. The Bakken formation, across North Dakota and Montana, sits on a virtual ocean of oil trapped within the hard rock. The new drilling technology has allowed E&P firms to tap into the Bakken and begin extracting that bounty — so much so that there actually is a glut of oil currently sitting in the Cushing Storage Depot in Oklahoma. Prices for West Texas Intermediate (WTI) crude have fallen by the wayside in the wake of the glut.
This is where it gets problematic. Despite the abundance of WTI oil in Cushing, the United States doesn’t have any way of really accessing that crude in the key refining areas of the Northeast. Currently, the pipelines that connect Cushing to various refineries and ports are pointed toward the Gulf Coast. These lines originally were designed to move imported tanker oil north from the gulf into the Midwest. Turning a pipeline around is a laborious process, and while there are plans to reverse the flows, that still takes time. Likewise, TransCanada’s (NYSE:TRP) approved southern leg of the infamous Keystone XL pipeline is only now beginning construction.
The Keystone South approval prompted White House Press Secretary Jay Carney to release a statement saying, “Moving oil from the Midwest to the world-class, state-of-the-art refineries on the Gulf Coast will modernize our infrastructure, create jobs, and encourage American energy production” — but it still doesn’t help motorists in the Northeast. Currently, only one pipeline moves oil from the Midwest northward: the 5,500-mile Colonial pipeline. However, this line is inefficient, old and over-taxed.