Cheap oil prices and the economic prosperity they bring can make politicians and investors look smarter than they are. In this interview with The Mining Report, Stansberry Research Editor Matt Badiali shares the secrets for finding underappreciated commodities and companies before they become overpriced, and names his favorites.
The Mining Report: You have said that Hillary Clinton could go down in history as one of the best presidents ever. Why?
Matt Badiali: Before we get your readership in an uproar, let me clarify that the oddsmakers say that Hillary Clinton is probably going to take the White House in the next election. Even Berkshire Hathaway CEO Warren Buffet said she is a slam dunk. I'm not personally a huge fan of Hillary Clinton, but I believe whoever the next president is will ride a wave of economic benefits that will cast a rosy glow on the administration.
Her husband benefitted from the same lucky timing. In the 1980s, people had money and felt secure. It wasn't because of anything Bill Clinton did. He just happened to step onto the train as the economy started humming. Hillary is going to do the same thing. In this case, an abundance of affordable energy will fuel that glow. The fact is things are about to get really good in the United States.
TMR: Are you saying shale oil and gas production can overcome all the other problems in the country?
MB: Cheap natural gas is already impacting the economy. In 2008, we were paying $14/thousand cubic feet ($14/Mcf). Then, in March 2012, the price bottomed below $2/Mcf because we had found so much of it. We quit drilling the shale that only produces dry gas because it wasn't economic. You can't really export natural gas without spending billions to reverse the natural gas importing infrastructure that was put in place before the resource became a domestic boom. The result is that natural gas is so cheap that European and Asian manufacturing companies are moving here. Cheap energy trumps cheap labor any day.
Some peripheral beneficiaries from this cheap energy are in the chemical space. Dow Chemical Co. and others that make things from petroleum will benefit. One of my favorite plays on cheap energy right now is CF Industries Holdings Inc., a nitrogen fertilizer company. The single biggest cost to this company is natural gas. That is a great business as long as natural gas prices stay low.
The same thing is happening in tight crude oil. We are producing more oil today than we have in decades. We are filling up every tank, reservoir and teacup because we need more pipelines. And it is just getting started. Companies are ramping up production and hiring lots of people. By 2016, the U.S. will have manufacturing, jobs and a healthy export trade. It will be an economic resurgence of epic proportions.
TMR: The economist and The Prize author Daniel Yergin forecasted U.S. oil production of 14 million barrels a day (14 MMbbl/d) by 2035. What are the implications for that both in terms of infrastructure and price?
MB: Let's start with the infrastructure. The U.S. produces over 8.5 MMbbl/d right now; a jump to 14 MMbbl/d would be a 65% increase. That would require an additional 5.5 MMbbl/d.
To put this in perspective, the growth of oil production from 2005 to today is faster than at any other time in American history, including the oil boom of the 1920s and 1930s. And we're adding it in bizarre places like North Dakota, places that have never produced large volumes of oil in the past.
North Dakota now produces over 1.1 MMbbl/d, but doesn't have the pipeline capacity to move the oil to the refineries and the people who use it. There also aren't enough places to store it. The bottlenecks are knocking as much as $10/bbl off the price to producers and resulting in lots of oil tankers on trains.
And it isn't just happening in North Dakota. Oil and gas production in Colorado, Ohio, Pennsylvania and even parts of Texas is overwhelming our existing infrastructure. That is why major pipeline and transportation companies, like Plains All American Pipeline L.P. and Enterprise Products Partners L.P., have exploded in value. They already have some infrastructure in place and they have the ability to invest in new pipelines.
There's also a massive amount of growth coming in companies that can process oil quickly. Valero Energy Corp., a giant refining company, is adding to its existing capacity. Alon USA Energy Inc., another refiner, is adding to its rail offloading capacity. It's actually ramping up from 13 Mbbl/d to 150 Mbbl/d at one California refinery.
The problem we are facing in refining is that a few decades ago we thought we were running out of the good stuff, the light sweet crude oil. So refiners invested $100 billion to retool for the heavier, sour crudes from Canada, Venezuela and Mexico. That leaves little capacity for the new sources of high-quality oil being discovered in our backyard. That limited capacity results in lower prices for what should be premium grades.
One solution would be to lift the restriction on crude oil exports that dates back to the 1970s, when we were feeling protectionist. It is illegal for us to export crude oil. And because all the new oil is light sweet crude, the refiners can only use so much. That means the crude oil is piling up.
Peak oil is no longer a problem, but peak storage is. If we could ship the excess overseas, producers would get a fair price for the quality of their products. That would lead them to invest in more discovery. However, if they continue to get less money for their products, investment will slow. There is some good news on that front though.
Pioneer Natural Resources Co. produces ultralight crude oil called condensate from its Eagle Ford shale wells in Texas. The U.S. Department of Commerce, which regulates oil exports, approved the export of that condensate, if it is run through a simple "splitter." That's the simplest kind of refinery. Allowing companies to export split condensate could buoy falling oil prices and relieve some supply problems. However, it won't solve the whole problem.