Energy Bill: Our Dependence on Foreign Oil

Recent U. S. economic data and the course of the stock market are indicative of the effects of energy insecurity. Growing transportation needs coupled with declining domestic oil production have left the nation increasingly dependent on foreign oil. Any responsible energy plan must balance transportation needs with the imperative to reduce dependence on foreign oil.

Sky-rocketing Oil Prices.

Oil prices have been on a roll this year. As of August 10, crude oil prices have climbed over 45% since the start of 2004. Light sweet crude traded on the New York Mercantile Exchange recently recorded its all time high of $45.04 per barrel. And this has happened at a time when the Organization of Petroleum Exporting Countries has increased oil output.

Earlier in the year, the run up in oil prices was attributed to surging demand for petroleum products due to a strong global economy. Then it was the unrest in Venezuela and Nigeria.

Concerns on security of oil supplies have heightened more recently. Added to the pipeline disruptions in Iraq are kidnappings of foreign workers in the Middle East.

Yukos, the Russian oil company’s tax evasion dispute has taken center stage currently. With a production rate of 1.7 million barrels a day (mmbd), Yukos is Russia’s largest oil producer.

While the underlying factors behind the dramatic increase in the price of oil this year are a combination of all the above, the impact is hardly comforting.

Weakening Economy.

Higher oil prices that work like an added tax have the effect of holding down hiring, consumer spending, and corporate profits.Weakening Economy.

The July jobs report that was released by the Labor Department on August 6 was a disappointment. The U.S. economy added a mere 32,000 to the non-farm payrolls, the lowest monthly addition this year. The rate of employment growth is slowing as business confidence appears to be undermined by rising oil prices. High oil prices are also taking the bite out of consumer spending.

By some economists’ estimates, every $10 rise in the price of oil knocks 0.5% off of GDP growth and adds about the same amount to inflation. The equity markets have been fixated with the trend in oil prices and have relentlessly spiraled lower since late June. On August 6, the Dow Jones Industrial Average closed at 9,815.33, its lowest level since Nov. 28 after losing more than 300 points over the last two sessions. The technology heavy Nasdaq Composite Index is down over 11% since the start of the year.

The Root Cause: Transportation Relies on Foreign Oil.

A combination of declining domestic oil production and increasing oil consumption has left the U.S. increasingly dependent on foreign oil.

The U. S. Department of Energy’s Energy Information Administration states that domestic oil production in 2002 was 5.8 mmbd, about 36% lower than the 9.0 mmbd produced in 1985. The total use of petroleum products on the other hand has grown from 15.2 mmbd in 1985 to 19.3 mmbd in 2002.

The lion’s share of oil consumption stems from transportation needs. In 2002, the transportation sector accounted for about 68% of total petroleum use with gasoline accounting for two-thirds of the petroleum consumed in the transportation sector.

U.S. net oil imports have grown from 4.3 mmbd in 1985 to 10.4 mmbd in 2002. Net oil imports as a percent of U. S. petroleum product use has risen from 28% in 1985 to 54% in 2002.

Based on Sandia National Laboratories and U. S. DOE/EIA forecast, an additional 7.5 mmbd of oil and petroleum products will have to be imported by 2020 to bridge the gap between growing consumption and falling domestic oil production. In 2020, U.S. oil production will supply less than 30% of U.S. oil needs.

The Energy Bill: Long-Term Plan for Energy Security.

The picture the current events paint as a preview of the future is cause for concern.

On August 6, Democratic presidential nominee John Kerry outlined a $30-billion, 10-year plan to veer the U. S. towards energy independence. The plan includes tax breaks and incentives for carmakers and buyers, coal producers and alternative fuels research. President Bush responded saying Kerry’s proposals mimic much of what Bush had already proposed but is stalled in Congress.

It will not be adequate if President Bush and Senator Kerry just reignite the energy debate. To bring clarity to energy security, we need a comprehensive long-term national energy plan that will reduce our reliance on foreign oil while meeting the nation’s growing transportation needs.

Both supply and demand sides of the transportation issue will have to be addressed to make a meaningful impact in reducing the dependence on foreign oil. Steps to increase the supply of domestic transportation fuels including alternatives to oil will likely be required. So too will efforts to reduce per capita transportation fuel consumption.

Based on what has been outlined to date, neither the Bush proposal nor the Kerry plan appears to fully address the critical transportation issue. The House-Senate conferees have an opportunity to deliver a responsible energy bill to the President’s desk for his signature. If the dependence on foreign oil is not reduced, the course of the U. S. economy and the stock market may well be shaped more by decisions made in Moscow, Riyadh, and Vienna rather than being determined by the decisions made at home.

 

Must-read Articles on Sector Investing

Using Sector Funds to Construct Diversified Mutual Fund Portfolios

High-potential diversified portfolios can be constructed by dividing assets among a group of sector funds. This approach gives the investor flexibility to over-weight or under-weight certain sectors versus broadly diversified indexes. 'Sector funds are too risky.' 'I doubled my money with Fidelity Select Technology in 12 months!' 'Avoid sector funds.' If all of this sounds confusing, you are not alone.

Sector Mutual Funds: How to Pick Winning Sector Funds and Avoid Losers

If you are looking to earn great returns from the stock market sector mutual funds are right up your alley. Sophisticated investors recognize the potential sector mutual funds offer and know how to make such funds work for them. You can consistently beat the market by investing in the right sector mutual fund at the right time. In fact, you can make money even in bear markets.

Sector ETFs: Invest in the Best Sector ETF Consistently

Sector ETFs are among the most potent investment vehicles that allow individual investors to exploit advantages previously available only to large institutions. You can beat the market by investing in the right sector ETF at the right time. In fact, you can actually make money even when the overall market is tanking. However all too often, investors use sector ETFs inappropriately and get their fingers burnt.

New ETF and Mutual Fund Recommendations

The Fidelity and ETF Core and Focus model portfolios have gained at annualized rates of 14.5% and 17.7%, respectively since 1994. The model portfolios will be repositioned with new mutual fund and ETF recommendations on Monday, September 30. Learn more about AlphaProfit's Free and Premium Service investment newsletters.

Recent MoneyMatters Blog Posts