Another Reason Oil Prices Could Plummet

As Americans, we’re constantly being told that domestic oil supplies are scarce. That concept is especially pervasive during this election season, as “reducing our reliance on foreign oil” has become a familiar refrain – namely from President Obama.

If that’s the case, then why are three of the largest oil companies in the world trying to export U.S. crude?

BP (NYSE: BP), Royal Dutch Shell (NYSE: RDS-B) and Vitol, the largest independent oil trading house on the planet, just applied to the U.S. government for export licenses, according to the Financial Times. Three other smaller companies also applied for licenses.

Surely, they’ll be denied their licenses…right? How can the U.S. afford to cough up any oil to other countries when the resource is supposedly so scarce?

Could it be because this whole “oil is scarce” credo has become a farce?

I’ll let the Financial Times answer that one:

“Domestic oil output in the US has rebounded strongly, to its highest level since 1995, after drillers pioneered new techniques to coax oil from reserves previously regarded as uneconomic.”

So it’s no wonder oil companies are trying to capitalize on that surplus. And there’s certainly opportunity out there for companies to make more money by ramping up U.S. exports.

In the past decade, the U.S. has exported an average of less than 100,000 barrels of oil per day. During that time, U.S. imports have been around 9 billion barrels a day.

What’s more pertinent to you as an investor is the impact a sudden influx of U.S. exports might have on oil prices. The extra crude-oil supply combined with the ever-sluggish global economy could push prices down, not up.

Your regular Resource Prospector Kevin McElroy wrote about this very phenomenon recently. He discussed M.K. Hubbert’s theory of peak oil – and how it is no longer useful “now that many other types of oil reserves are economical.”

“I know I’m running against the grain,” Kevin continued, “but I don’t even believe that we’re doomed for ever higher oil prices – necessarily. I think we could see oil prices drop by 50% or more in the next few years.”

Right now oil is still within striking distance of $100 a barrel even after a recent drop-off. With all the sovereign debt issues in Europe and the U.S. having to adopt a third round of quantitative easing to stimulate a slumping economy, it’s not the best environment for $100 oil – or even $90 oil.

Now that oil companies are asking permission to ramp up their U.S. exports, the increased supply may be another reason for cheaper oil prices.

If you’re an energy investor, that could weigh on some of your holdings.

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