Are Lower Oil Prices on the Horizon?

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Submitted by Emma Davis of Investment Contrarians as part of our contributors program.

By George Leong

The oil sheiks at the Organization of the Petroleum Exporting Countries (OPEC) must be at their wits’ ends these days, with oil prices showing some downward pressure.

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While the West Texas Intermediate (WTI) spot is in the mid-$90.00 range, there’s a sense we could see a downward move in oil prices, including gasoline prices at the pumps, on the horizon.

Over the past decades, OPEC’s decisions were largely influential in determining the direction of world oil prices. This was done by regulating the production of oil out of the Middle East.

The sad reality is OPEC has held the United States and other industrialized countries hostage simply by controlling the flow of oil and oil prices.

Texas oil baron T. Boone Pickens has long been a champion for domestically produced oil and for lessening the import of oil from OPEC, which he blames for keeping oil prices high.

The truth is that Pickens is correct.

Think about what happened in October 1973, when an oil crisis surfaced that saw some members of the Organization of Arab Petroleum Exporting Countries (the predecessor to OPEC) announce an oil embargo while also attacking Israel in the Yom Kippur War.

So here we are some 40 years later, and OPEC continues to dictate the global oil prices to a major degree, but the positive side is that it doesn’t have to be that way and it will likely change.

The fact is that the United States is producing more oil domestically than any other time in its history, and this includes the high potential flow of oil from the Canadian tar sands via the Keystone XL pipeline. While there are environmental issues with the pipeline, if they can be rectified, the U.S. could begin to further reduce its need for OPEC oil and instead buy Canadian oil.

Even without the Canadian oil, the domestic oil production, especially via the new fracking techniques (the fracturing of rocks below the earth’s surface to extract oil and natural gas), is resulting in new sources of oil that will surely help to cut OPEC oil prices and perhaps lower domestic oil prices.

The U.S. Energy Information Administration (EIA) just released its “Annual Energy Outlook 2013,” and it’s quite interesting. If you want to read the 233 pages (the report is available for download on the EIA’s web site), you are welcome to, but I will also summarize the findings for you.

The EIA predicts domestic oil production will continue to rise over the next decade due to oil from fracking and the rise in natural gas production.

The influx of natural gas as an alternative for oil and better gasoline consumption for vehicles will also help to cut the dependence on oil.

Domestic oil production has risen from 5.0 million barrels per day in 2008 to 6.5 million barrels daily in 2012, according to the EIA. As such, the country has seen its oil imports fall in each year since 2005. The end result could be lower oil prices on the horizon.

For investors, oil as a commodity is not dead.

The implication for investors is to buy companies that are involved in the fracking process along with oil and gas services oil stocks that deliver solutions to domestic oil production.

This article Are Lower Oil Prices on the Horizon? was originally published at Investment Contrarians