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Here's Why Oil Is So Expensive

Stocks in this article: UNG USO CMI CLNE UPS FDX

Either the U.K. will have to cut back on spending or it will increase energy production. One way or another, the end result should be lower oil demand from U.K. in relation to production.

France recently sent a clear message to the markets that it does not want to be left out of the party that Greece is currently enjoying. Spain is faced with an unemployment rate or more than 24%, and that's the official rate. I have written many times that I believe Europe's fiscal and debt crises are just getting started, rather than about to end. My position has not changed on the demand side.

Where the Next Boom Is Coming From >>

Norway and the U.K. are the big oil producers in the North Sea. Like the U.K., Norwegian production has fallen in recent years, creating a catalyst for higher energy prices. Fortunately for Norway, Statoil has made several discoveries in the last six months, resulting in an expected turnaround in production.

U.S.

North America may quickly be pushed aside by Asia as the largest energy consumer, but for the time being, North America is the largest market. Energy consumption has declined; however, I believe it would be an enormous mistake to count on lower oil prices, due to economic issues.

In my opinion, the largest driver of lower energy prices will be production increases. North Dakota has large amounts of proven oil reserves, but the infrastructure is not currently in place to deliver it to market. This can be expected to change, and quickly. Pennsylvania, like North Dakota, has massive amounts of natural gas waiting for cracking to set it free.

Companies like Cummins (CMI) and Clean Energy Fuels (CLNE) offer solutions to allow trucks and vehicles to run on natural gas instead of diesel. Cummins currently offers truckers and others the option for a natural gas engine instead of diesel.

Although the current cost to select a natural gas engine is higher than a diesel one, the cost per fuel mile is about half, making natural gas cheaper in the long run, if the price spread remains. Clean Energy is busy adding natural gas refueling stations across the United States to soon allow truck fleets to move goods coast to coast with adequate refueling capabilities.

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