Notes on an Energy Boom

Crude oil touched upwards of $78/bbl this week as reports of falling inventory levels, improved refining utilization, and a strong GDP report all pointed toward short supply and growing demand.

Today, the US (and the world) is producing and consuming record amounts of gasoline. Refining utilization increased to nearly 92%, a level not seen since last September and the highest year-to-date.

Thusly, familiar headlines about $100 oil are popping up again. Generally, these tout coming demise for the economy as commerce comes to a grinding halt in the wake of ever higher energy costs. This thinking is almost exactly wrong.

Truly sky-high energy prices would eventually curtail the economy. There's no denying that. But the fact is we're nowhere near those levels.

MarketMinder has long touted the surge in energy prices not as economic bane, but rather as a symptom of economic boon. If the last several years weren't evidence enough that high energy prices don't sink stocks of the economy (globally!), then we're not sure what to tell you.

The fact is, when the economy is booming it needs more and more energy to burn. Couple that with limited supply (it takes a very long time to bring new oil supply online), and we've got a recipe for higher equilibrium energy prices cooked up by our familiar friends, supply and demand.

Despite these clear factors, the average analyst forecast for crude in 2010 remains at $52/bbl. In other words, most still believe better than 30% of the price of crude oil is speculative.

That would be a nice theory if the facts reflected as much. Here we are, years now into the energy boom, and most experts are still telling us, essentially, high energy prices are a mania.

Meanwhile, the energy industry itself is showing nothing but signs of a continued boom. News of Transocean's $17 billion takeover of GlobalSantaFe has increased speculation other drillers will continue to return cash to shareholders through dividends or stock buybacks at a record pace. The drilling companies in particular have been sitting on huge amounts of cash while their backlogs steadily increase. This is nothing but a good thing for owners of energy shares.

And what of the refiners and gasoline retailers? News of Exxon's 1% reported year-over-year decline in earnings last quarter seemed to corroborate the story of a downturn in the earnings growth cycle for energy companies, right? In fact, earnings results so far in the energy biz have generally come in above expectations as international revenues remain the main growth driver. Particularly bullish were earnings reports from international energy services, many of which reported earnings above expectations due to strong demand and higher margins.

The common feature, spread throughout the energy industry, is surging demand globally led by an economy that's expanding faster than most anticipated. The boom isn't over, and in the short to intermediate term more growth and limited new supply is the ticket. With many cash-rich energy companies valued at dirt cheap levels relative to the market, now is still a great time to be invested in the sector.

Trends can last a lot longer than most folks think. The energy industry was in a decades-long slump, and now it's in a sustained boom. Instead of fearing it, we think it's better to profit from it.