March 14th, 2022

The Real Reason Gas Prices are Soaring

money coming out of gas tank

Dear Rebel Investor,

Last year I spent about six months exploring the good ol’ USA.

I hiked alongside the Grand Tetons… visited Yellowstone…  viewed Mt. Rushmore… traipsed through the Badlands… trekked the Sonoran Desert…

What a blast.

It was so much fun I was planning on another road trip this summer.

But I’m not so sure now.

You can guess why.

Yup, today’s insane gas prices have me rethinking my summer plans.

My sojourn last year covered 9,000 miles and cost about a thousand dollars in fuel.

As I write this now, I’ve calculated that cost would be nearly double.

By summer, it could easily be much more.

Already gas is $5.89 at my local Valero station here in Healdsburg, California.

(At least I don’t drive a big-ass truck… one guy I know said it cost nearly $200 to fill his Dodge Ram the other day!)

We all know why gas prices are skyrocketing

Or do we? Everybody’s blaming Russia’s invasion of Ukraine.

It’s easy to see why – the invasion has freaked out the markets.

Will the war expand into Western Europe?

Will NATO get involved?

Will American troops be sent in?

As a result of these (and even worse) fears, commodities have spiked.

Especially crude oil.

The day of the invasion (Feb. 24), crude opened at $92.52 a barrel.

Two weeks later (March 8), it spiked over $10 and got as high as $129.44.

The latter came courtesy of President Biden’s March 8 announcement of a ban on Russian oil imports into the U.S.

That action, of course, followed a multitude of crippling Western sanctions against Russia that were enacted several days before.

So on the surface, it makes sense that the war between Russia and Ukraine – and the sanctions against Russia that followed – are what’s caused today’s high gas prices.

But a deeper dive into the issue shows that…

Russia isn’t solely responsible for today’s outrageous gas prices

It’s so easy to place the entire blame on Russian President Vladimir Putin.

And that’s exactly what the U.S. is doing.

In fact, President Biden has called skyrocketing U.S. gas prices “Putin’s price hike.”

But that’s an oversimplification that conveniently ignores other reasons.

Yes, Russia has played a role in the crazy spike in energy.

After all, it’s the world’s third biggest oil producer.

As such, it produces about 10.5 million barrels a day – about 11% of the world’s supply.

Yet the U.S. only gets 3% of its imported oil from Russia – not nearly enough to justify the recent spike in the price of U.S. gas.

So I’m afraid that blaming Putin for our gas price hikes is the government’s way of obscuring other more important reasons.

The seeds for today’s outrageous gas prices were planted years ago

You’ve probably already figured this out. Biden planted many of those seeds.

When he was sworn in, gas in the U.S. averaged $2.29 a gallon.

Now its average is nearly twice as high – and MUCH higher here in California.

It’s no wonder when you consider Biden’s energy policy.

The day he took office, he rescinded the federal cross-border permit for the Keystone XL pipeline from Alberta, Canada.

Had he not done that, Keystone would be complete by now.

And it would be moving far more (cheap) Canadian crude into the U.S. than had been coming in from Russia.

Unfortunately for any American with a car, Biden didn’t stop with Keystone.

After nixing that project, he suspended some federal oil and gas leases.

Then he implemented higher drilling fees on federal land.

And he topped all that off by announcing expensive new environmental rules for any new domestic pipeline projects.

It’s no surprise that these measures have made the oil industry less than enthusiastic about searching for new domestic oil reserves.

Other factors that have contributed to today’s energy crisis

One is Wall Street.

For years, investors have pressured oil and gas companies to cut capital expenditures.

They’ve insisted that these companies pay down debt instead and reward shareholders with bigger dividends and buybacks.

And that’s what the U.S. shale oil industry’s been doing.

Sure, shareholders are happy about that.

American drivers?

Not so much.

The sad truth is that shale oil industry investment in new U.S. wells crashed 60% from 2014 to the end of 2019.

As a result, U.S. crude oil production nosedived a staggering 25% a day during that time.

That amounts to 3 million barrels – A DAY.

Then in 2020 the pandemic hit.

The lockdowns that followed forced millions of people to stay home, which caused demand for gas to plummet.

Result?

The biggest short-term drop in shale oil production in U.S. history…

Not to mention the biggest drop-off in domestic upstream shale oil projects in 15 years.

Now of course, demand for gas is back with a vengeance.

(That 3 million barrels of oil per day we’ve lost since 2014 would sure come in handy now, wouldn’t it?)

Will domestic producers boost supplies and save the day?

Maybe.

But that will take a change of heart from the Biden Administration.

That obviously hasn’t happened yet… and may never happen.

My guess is It won’t happen any time soon.

I say that because it appears Biden is totally wedded to the idea that fossil fuels are causing climate change.

That’s why it seems (to me at least) that he’s hell-bent on diminishing the domestic oil industry as fast as possible… and damn the consequences.

So if domestic oil producers won’t ramp up production to bring down gas prices, how about OPEC?

A few days ago, the United Arab Emirates said it’s in favor of ramping up OPEC production.

But Saudi Arabia – the big gun of OPEC – is not.

That country’s essentially told Biden that if he wants more oil, the U.S. should pump it.

Now Biden’s begging long-time foe Venezuela (whose president, Nicloas Maduro, is regarded as a dictator) and Iran to crank out more oil in exchange for a reduction in American sanctions against these countries.

It remains to be seen if those efforts will succeed.

Yet even if they do, the specter of World War III will continue to hang over the world as long as Russia and Ukraine are at war.

There’s no telling how long that conflict will last.

Bottom line – high oil prices are likely to stay high until it ends. Or longer.

The silver lining of high energy prices for retail investors

Did you know that, as a group, energy sector stocks are cheap right now?

It’s true.

They were trading at just 12.3 times earnings right before Russia invaded Ukraine.

Now, thanks to the massive spike in oil, the energy sector’s P/E has risen to 16.2.

But that still beats the pants off the S&P 500’s whopping 34.5 P/E.

Yup, energy’s clearly been on a roll.

Many analysts believe the sector’s strong performance will continue.

The reason – they expect oil prices to stay high for years.

For all the reasons I’ve been talking about, I agree.

So how to invest in this raging bull market in energy?

The biggest gains will come from investing in small-cap explorers and producers.

One interesting consideration is Parex Resources, Inc. (PXT.TO; OTCPK:PARXF).

This $2.6 billion company is also headquartered in Canada… but conducts its oil and gas projects in Columbia.

Columbia is heavily dependent on oil and gas revenues.

That’s why its president, Iván Duque Marquez, is working hard to attract more foreign investment in energy development and exploration.

Parex stands to profit handsomely from his efforts because it holds interests in about 2.3 million gross acres over 24 onshore blocks in Colombia.

Investors obviously like what they see in Parex, as over the past three months they’ve bid the stock up 34%.

Odds are good that it’s got much more room to run.

That’s it for today.

I’ll close by noting that gas in Colombia is just $2.36 a gallon right now.

Hmmm… maybe I should go down there this summer.

Cheers,

Doug Fogel
Contributing Editor, Dear Retail Investors

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