We all know the story: The U.S. is a major importer of crude oil — each year we spend billions of dollars importing Texas tea from a variety of nations from the Middle East to Canada and rack up huge trade deficits in the process.
While the current fracking revolution in places like the Bakken Shale are helping turn the tide and perhaps move the U.S. toward energy independence, the truth is we still import the bulk of crude oil.
We’ve written about the harsh reality that has been the downstream or refining sector before here on InvestorPlace. The refining sector looked pretty grim earlier this year when higher crude oil prices put severe pressures on the refiners’ margins.
Refineries make money on the “crack spread,” or the difference between the price of crude oil and the gasoline, jet fuel and other petroleum products that are extracted from it. Higher oil prices coupled with dwindling demand crippled refiners’ margins, and many firms within the sector struggled.
However, times are a-changin’ for the downstream sector. The refiners are realizing a huge boost to their bottom lines, not only from lower crude oil prices — but from exporting record amounts of gasoline.
And these record exports of gasoline affect not only investors in the sector, but American drivers as well.
The First Time Since the 1940s
The beginning of 2012 marked an interesting turning point for U.S. refiners. For the first time since 1949, the U.S. exported more gasoline, heating oil and diesel fuel than it imported. For the 12 months ending in May, the U.S. exported an average 2.6 million barrels a day of refined products, almost double the rate at the start of 2008. That’s a big shift.
The real question, though, is why has that sudden shift to exporting gasoline and other refined petroleum product taken place?
To start, the shale and hydraulic fracturing revolution is really beginning to push up domestic crude production. Likewise, rising Canadian oil sands production is helping boost crude inventories stored in the U.S. Add this to infrastructure bottlenecks, and the link between North American energy prices and the rest of the world has been weakened.
For example, U.S. natural gas prices are roughly $3 per million BTUs. However, both Europe and Japan pay approximately $10 and $17, respectively. Similar price discrepancies exist among the various grades of crude oil — the biggest being the difference between U.S. benchmark West Texas Intermediate (WTI) and global standard Brent.
Lower feedstock costs mean bigger crack spreads and margins for the refiners. Cheaper oil brings down raw material costs, while decade-low natural gas prices bring down energy bills. Valero (NYSE:VLO) CEO Bill Klesse cited the low cost of natural gas and access to cheaper crude in the company’s earnings release as a key driver for recent profits.
Yet, as the U.S. economy plods along and new energy efficiency measures take hold, domestic demand has dropped. U.S. demand for gasoline has fallen nearly 10% in recent years, and that trend is continuing.
The Energy Department predicts that U.S. gasoline demand will fall for the third straight year in 2012 and drop again in 2013. The U.S. is roughly burning about the same amount of gasoline it did in 2001, and consumption across all petroleum products — including diesel, jet fuel and heating oil — has fallen back to 1997 levels.
Putting It All Together
So what gives? You would think that a domestic glut of gasoline would help drive prices at the pump down for U.S. consumers. Well, nothing in the world of commodities is as simple as local supply and demand.
While demand has dwindled here in the U.S., in places like China and Brazil it has more than tripled. Along with the rise in emerging-market demand, prices for gasoline and other refined fuels in those countries have also risen by as much.
Basically, U.S. refiners are using their low cost advantage over foreign downstream operators to export record amounts of gasoline and profit from the spread. It’s only natural for an economic agent to try to maximize their profit and utility. For the downstream sector, that means shipping your refined products abroad.
For consumers here at home, that means being subjected to future price floors as well as less overall available gasoline as refiners export our excess. Add in events such as Chevron’s (NYSE:CVX) recent fire at one of its key refineries and you have a recipe for sustained higher gasoline prices. Already, California drivers have been feeling the pricing pressures due to the Chevron disaster.
On the flipside, if you’re a refiner with access to cheap crude — say via TransCanada’s (NYSE:TRP) Keystone XL pipeline — now could be the start of a new golden age.
InvestorPlace contributor Susan Aluise also recently highlighted the opportunites in Marathon Petroleum (NYSE:MPC), Valero and Conoco (NYSE:COP) spin-off Phillips 66 (NYSE:PSX). All three reported increases in the amount of gasoline and diesel they exported in the last quarter. A trend that will surely grow — short of potential federal regulations.
Overall, that trio of refiners offers the best way to play rising U.S. gasoline exports. They could also potentially lessen your pain at the pump.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.