Moving the oil

Big Oil wasn't the only group of companies caught short by the unconventional oil shale boom in the United States. The mid-continent oil infrastructure wasn't ready for the boom, either. Whether it's a lack of pipelines, pipelines designed to flow in the wrong direction or even a lack of storage facilities, the infrastructure hasn't been able to handle the increased production of oil from these unconventional plays.

The result is a huge gap between the price that oil from these regions brings and the global market price for oil. Recent quarters have seen a huge discrepancy open up between the European Brent benchmark and the U.S. West Texas Intermediate benchmark. On Nov. 16, for example, WTI closed at $86.92 a barrel and Brent closed at $108.95 a barrel.

But that captures only some of the price gap created by the U.S. production boom. For example, on Nov. 8, at Midland, Texas, in the heart of some of the biggest unconventional plays in the country, WTI closed $7 a barrel cheaper than at the big central oil terminal in Cushing, Okla. The price difference between WTI and the Gulf Coast's Louisiana Light and Sweet has ranged recently from $8.50 to $30 a barrel.

Those price differences are a reflection of a glut of oil from these new sources because of a lack of transportation capacity to get the oil to Cushing or to the big refineries on the Gulf Coast.

As you might imagine, price differences like that have created boom times for any company that can get a bucket of oil to the end markets. It costs about one-third as much to transport oil by pipeline as it does by rail, but it takes years to build a pipeline. In the meantime Burlington Northern, now owned by Warren Buffett's Berkshire Hathaway (BRK.A), and Union Pacific (UNP) have seen rising revenue from this oil boom (just in time to make up for a decline of shipments in coal).

The big build-out plays

Eventually, the pipelines will catch up -- and the longer the boom runs, the more sense it makes to build a new pipeline. From that long-term perspective, I'd look at Magellan Midstream Partners (MMP), because of its focus on pipelines in the mid-continent region and its connections to Anadarko Petroleum, one of the biggest players in the Bakken formation, and Plains All American Pipeline (PAA), with its interesting mix of pipelines and storage capacity in the region.

I'd like to get these shares of these a little cheaper than they trade today, with dividend yields of 5% or higher. They now yield 4.67% and 4.82%, respectively.

There's a similar investment opportunity in the demand for liquefied natural gas terminals that would enable natural gas producers to ship cheap gas from producers in the United States and Australia -- on trend to run neck and neck with Qatar as the world's largest exporter of natural gas by 2030. If you're interested in investing in this transportation trend, I'd suggest Cheniere Energy (LNG), the leader in the race to build the first liquefied natural gas export terminal in the United States.

The increase in U.S. oil production isn't occurring in isolation. The same fracking technologies and unconventional geologies that are at the heart of this increase in oil output have produced an even bigger boom in natural gas production. Between the two hydrocarbons, energy prices in the United States will be cheap compared with those in the rest of the world. Electricity, for example, is forecast to be about 50% cheaper in the United States than in Europe, according to the International Energy Agency, over the next two decades as the U.S. relies on cheap natural gas to fire new power plants.

The cheap energy plays

Cheap energy is no guarantee of faster economic growth, but it sure won't hurt, as cheap energy prices get factored into the thinking of companies trying to decide where to locate production. The biggest effect will be in industries where energy --and natural gas in particular -- is a huge percentage of the cost of raw materials. Think Dow Chemical (DOW), DuPont (DD), and LyondellBasell Industries (LYB) in chemicals or CF Industries (CF) in nitrogen fertilizers. Companies that rely on the chemicals produced by these companies for raw materials for their own products will also benefit from lower U.S. energy costs. Paint-maker Sherwin-Williams (SHW) comes to mind.

And the effects of cheap U.S energy and the boom in U.S. oil and natural gas production aren't limited to the U.S. economy. I don't expect global oil prices to fall dramatically as more U.S. oil production works its way into the global supply chain, first as refined petroleum products and eventually as oil exports. The gradual recovery in U.S. and Chinese economic growth should keep prices in something like their current range. But that current range is bad news for some of the world's biggest oil exporters, and most especially Russia. Russia needs an oil price near $120 a barrel to balance its national budget and to attract the capital it needs to modernize its own industry.

It's not clear that the surge in U.S. oil production is enough to put a damper on the very expensive oil produced by Canada's oil sands industry or that promised from Brazil's deep, deep, deep water South Atlantic finds, but I'd certainly steer my portfolio away from the most financially leveraged companies in these projects. Cheaper natural gas and oil aren't exactly what the beleaguered global solar and wind industries need, either.

What could change the trend

And, of course, in general it pays to think about what can go wrong -- and about how fast the energy picture can change (and change again). A good part of the swing toward the possibility that the U.S. will become an oil exporter again –- or at least achieve self-sufficiency in energy use and production -- is due to expanding production. But it is also a result of increased energy efficiency in the U.S. economy prompted by higher energy prices over the past decades. (The International Energy Agency says production is about 55% of the story and energy efficiency 45%.)

If an increase in oil production leads to a rollback in those gains in energy efficiency, you can throw energy self-sufficiency as a goal out the window. (The International Energy Agency has said that its projections for U.S. energy self-sufficiency assume that the U.S. will continue to increase energy efficiency for its cars, homes and appliances.)

I'm sure this boom in U.S. energy production from unconventional sources will persuade many people to completely discount the theory known as Peak Oil. Certainly the hard form of Peak Oil is dead, but the more realistic form, which held that U.S. production from conventional sources had peaked in the 1970s and was in decline, still looks good for the U.S. and the global oil industry as a whole. From this perspective, you can think of each successive "exhaustion" of a conventional source of oil as something that will move the base price of oil higher, even if all the conventional supply is replaced by (more expensive to produce) unconventional sources.

And finally, of course, there's the possibility that the real world will deliver enough disasters, storms and data to convince everyone that global climate change is real and that the world needs to reduce its burning of all forms of hydrocarbon, even natural gas. Personally, I find the data on climate change convincing, and I wish that the United States and the world would move on this problem sooner rather than later. But just because I wish it doesn't make it so. One of the essentials in investing is separating the world as you'd like it to be from the world that is likely to be. Surveying the world, with some sadness, I don't see action on global climate change as a near- or medium-term danger to any investment in oil stocks.

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Updates to Jubak's Picks

These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund owned shares of Cheniere Energy at the end of September. Find a full list of the stocks in the fund as of the end of September here.

Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.

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