Is America Creating an Oil Bubble?

Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With everyone looking for oil, it is possible we have an oil bust in the making. Production and consumption levels are the canaries in the coal mine. In the past 10 years U.S. oil consumption has fallen 7.38%, while U.S. oil production has risen 20.96%. These numbers do not mean that it is certain that an oil bust is coming, but it is a possibility. 

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US Oil Consumption data by YCharts

Look at Inventories

In the past 10 years, inventories of U.S. crude oil and petroleum stocks have increased 18.29%. With inventories stacking up, there is more downward pricing pressure in the market. America is drilling more wells, yet it is using less oil. The free market is prone to big bubbles and busts, as the recent housing market has shown. The 1980s oil glut could repeat itself. 

Tesla (NASDAQ: TSLA) is developing pure electric cars, not just hybrids. Last quarter, the company brought in just $561 million in sales. It is a pea compared to the major car companies like General Motors or Toyota, but Tesla is educating consumers that it is possible to completely abandon gasoline. Americans will not stop using gasoline powered vehicles overnight, but this is a worrying trend for energy investors.

As an investment, Tesla is extremely risky. It is planning to develop a network of superchargers to let people travel between cities. In the long run this is necessary, as it will make customers feel safer about leaving gasoline. Still, it is an expensive investment and Tesla is planning to let customer charge their cars for free. Tesla has a total debt to equity ratio of 2.7, a gross margin of 16.8% and brought in just $11.52 million in EBIT last quarter. 

The Other Side of the Coin

One bullish argument for American crude is that America is simply replacing imports with domestic production. It is true oil production has increased 20.96%, while imports have fallen 22.20%. Still, inventory levels are increasing. If it were simply a matter of displacing imports, then inventories would stay constant. 

Another bullish argument is that the decline in U.S. consumption doesn't matter, because world oil demand is increasing. One of the biggest problems with this argument is the law that bans exports of raw American crude. Only refined products can be exported. China's demand for oil is increasing, but America's upstream oil producers are forced to sell their oil at low prices to large U.S. refiners.

Also, major consumers like China are creating alternatives to crude based fuels. By 2020 the Middle Kingdom plans to have 50,000 kilometers of high speed rail.  

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US Crude Oil and Petroleum Products Ending Stocks Excluding SPR data by YCharts

Where to Invest?

In the face of a possible U.S. oil bubble, Valero Energy (NYSE: VLO) is a good investment to look at. Building a network of refineries is very expensive, and Valero is in great position to use America's export ban of raw crude to its advantage. It can buy cheap West Texas Intermediate (WTI) crude and sell expensive gasoline and diesel products overseas. Also, the company is building a number of new facilities that will help it to take advantage of America's cheap supply of natural gas. 

The firm's balance sheet is clean with a total debt to equity ratio of 0.37. Its return on investment (ROI) of 12.8%, EBIT margin of 3.9%, and profit margin of 2.3% could be a tad higher, but the company does offer a nice yearly dividend of $0.80. Also, as Valero builds out its new hydrocrackers its margins should increase. 

ExxonMobil (NYSE: XOM) is another good investment to look at. It owns a number of legacy fields in the U.S. that help to keep costs down. Unlike smaller firms focused in high-cost areas, a drop in WTI will not destroy ExxonMobil's profits. The company has significant refinery operations to stabilize earnings. Just like Valero, it is able to benefit from cheap U.S. crude prices by selling refined products overseas. Even in 2009 when the price of WTI had fallen significantly, ExxonMobil produced an EBIT of $35.33 billion. 

The company has a clean balance sheet with a total debt to equity ratio of 0.08. Its ROI of 27.3%, EBIT margin of 16.6%, and profit margin of 10.2% are very strong, and they give the profits the company needs to maintain its operations.


America's crude production and inventories are increasing, while its consumption and imports are falling. A crude bust may be in the works. It is a good idea to protect yourself with dependable refiners like Valero and ExxonMobil. Tesla is an important company to watch, but until its profits are more secure it remains very risky.  

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Tesla Motors . The Motley Fool owns shares of Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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