The Best Competitive Advantage on the Market

Editor's note: Building a new oil refinery in America has become almost impossible. That may be bad news for consumers – but it can be great news for investors. In this issue, Extreme Value editor Dan Ferris explains how new regulations are limiting domestic oil production... and why that hidden barrier creates a powerful advantage for investors.

This oil refinery will never be built.

That probably sounds like a bold claim...

After all, Meridian Energy has spent nearly a decade promising that its Davis Refinery in western North Dakota is just around the corner.

On paper, it looked like the perfect location. What better place to build a refinery than in the heart of the Bakken oilfield, one of the most prolific oil regions in the world?

Meridian first proposed the Davis Refinery project in 2016. It broke ground in 2018, and operations were set to begin in 2020. While COVID-19 slowed things down, the promises kept coming...

In 2022, CEO William Prentice told North Dakota regulators that the refinery would reach full commercial production by December 2025.

But today, there's still no refinery.

Construction has been delayed by lawsuits from environmentalists and landowners. And Meridian has only raised $35.6 million of the $1 billion it estimated the project would cost.

On March 10, President Donald Trump laid out plans for another new refinery on Truth Social.

It sounds promising. But it will most likely never get off the ground.

These projects rarely fail for lack of demand. They fail because the U.S. has made it extraordinarily difficult to build a refinery in the first place.

And understanding why reveals one of the most powerful competitive advantages an investor can find...

Opportunity Without Execution

Meridian's Davis Refinery could have been the first full-conversion greenfield petroleum refinery built in the U.S. since 1977. (That simply means it could turn lower-value crude oil into products like gasoline, diesel, and jet fuel.)

Instead, it has become another reminder of how difficult it is to build major energy infrastructure in the U.S.

And Davis isn't the only example.

Trump took to social media to promise another refinery – near the Port of Brownsville in Texas...

Just like Davis, the site seems ideal. Texas is America's largest oil-producing state. The Port of Brownsville is a major energy and shipping hub with deepwater access and extensive infrastructure.

But one critical piece is missing... Brownsville lacks the necessary pipeline to deliver crude oil.

A pipeline was promised there years ago. Oil-pipeline company Centurion Terminals leased 55 acres at the Port of Brownsville in 2015 and another 185 acres in 2017. Jupiter Energy – a crude-oil logistics provider – acquired those assets in July 2017, with plans to build a 650-mile pipeline connecting the Permian Basin to Brownsville, Corpus Christi, and Houston.

This pipeline was proposed and permitted... but never built.

These projects aren't failing because America lacks oil. They're not failing because refiners don't see an opportunity.

They're running into the same obstacle over and over again...

The Barrier Everyone Underestimates

It all comes down to laws and regulations.

Over the past several decades, environmental rules have made building and operating refineries effectively impossible in the U.S.

The Clean Air Act amendments of 1970, 1977, and 1990 tightened emissions requirements. In 2000, the Environmental Protection Agency ("EPA") reduced the amount of sulfur allowed in gasoline and diesel fuel by 90% to 97%. Then, it tightened those standards again in 2017.

Existing refiners have spent billions of dollars complying with these rules.

Since March 2000, the Energy Information Administration has entered into 37 settlements with U.S. companies that control more than 95% of the nation's petroleum-refining capacity. These settlements cover 112 refineries in 32 states and territories. The companies involved have agreed to invest more than $7 billion in pollution-control technologies.

And regulators continue raising the bar.

Last September, the EPA put out an enforcement alert on benzene levels. The agency will review refiners' compliance with emission limits as well as the production, storage, and transport of benzene-related materials.

None of this means building a refinery is technically impossible. But it has become extraordinarily difficult in practice.

That's why the U.S. continues losing refining capacity. Phillips 66 recently closed its refinery near Los Angeles. Valero Energy is shutting down another one near San Francisco.

New competitors aren't replacing them. And that's where the opportunity takes shape.

Bad News for Consumers, Better News for Investors

A lot of people look at this trend and see a problem.

Fewer refineries means tighter fuel supplies and higher gasoline prices whenever global energy markets are disrupted.

Investors should see something else...

Strict regulations are better for investors and stock pickers. They're a barrier to entry in the energy sector – one of the greatest competitive advantages a business can have.

The banking industry is a classic example. Big banks love regulations that make it more expensive for smaller banks to grow beyond a certain size. Meanwhile, the largest players can acquire enough new assets to leapfrog past regulatory thresholds and lighten the burden of higher compliance costs.

It's no different in the oil-refining industry. The big refiners might sound like they're complaining about the cost of regulations. But that's just part of the "regulatory theater"... They either comply with regulations or pay the fines. Either way, refiners will continue to keep the competition at bay.

Consumers may not benefit from that reality. But existing refiners do.

And that's the investing lesson here.

The hardest part of investing isn't finding industries with strong demand. Plenty of businesses have that.

The real opportunity is finding industries where demand is growing, but new competitors can't easily enter. Oil refining has become one of them.

That's why my current slogan when it comes to this industry is, "If you can't beat 'em, own 'em."

Good investing,

Dan Ferris

Editor's note: Washington is exploring new ways to address America's $36 trillion debt burden. And Wall Street's biggest names are already positioning themselves for the looming shift in monetary policy. Dan says the window to prepare is closing quickly – and explains why this story could create one of the largest investing opportunities he has ever seen.