The Gateway Drug to Oil Addiction

Abraham Gesner changed the world... almost.

Narrowly missing success was actually in his blood. His father narrowly missed success when, in 1776, he sided with the British loyalists. Abraham grew up in Canada, where his family sought refuge from the revolution. There, he developed a strong love of geology. Later, he studied chemistry and medicine in London.

By the 1840s, the high price of whale oil was driving aggressive efforts to develop an alternative fuel for lamps. Abraham Gesner experimented with coal and asphalt and created "illuminating oil" for burning in lamps.

He called this new oil keroselain, which he later shortened to kerosene.

Gesner's kerosene caught on quickly. By 1859, 34 companies were distilling kerosene from coal. Things were going very smoothly in the "coal oil" industry with revenues of $5 million per year. That's about $80 million in today's terms.

Kerosene from oil wasn't a factor in the U.S. kerosene market because there wasn't a source. However, the discovery of cheap, plentiful oil in Titusville, Pennsylvania, changed all that.Europe rapidly turned to kerosene for lighting homes. By 1854, Vienna and Eastern Europe were filling homes with light from special lamps lit with kerosene. Unfortunately, for Gesner, Europeans were using kerosene made not from coal, but from oil.

The coal-to-kerosene industry came to a screeching halt.

In fact, a Yale chemist, Benjamin Silliman wrote a paper on the distillation of oil into various products, including kerosene. His fame for that paper eclipsed Gesner's original invention.

Gesner died without reaping monetary reward for his discovery. Although a few trumpet his name as the savior of the whales, his role in the oil industry is somewhat obscured by later figures.

In fact, Gesner and Silliman's discovery of the nature of hydrocarbons is the root of our admitted addiction to oil. Kerosene was merely the gateway drug.

The key to crude oil's utility is in cracking it into component products such as kerosene, butane, propane, and gasoline. Cracking crude in commercial quantities requires huge refineries.

Oil refineries are ugly, polluting businesses. You can see these mazes of pipes and towers around big cities such as Salt Lake City, Houston, and Philadelphia. These smelly, dirty eyesores are impossible to build in the U.S. and nearly impossible to build in North America.

And as unsightly as the facilities are, refining stocks historically have been no more attractive to Wall Street. Tight margins, high costs, and regulations that strangle innovation have made refining bad businesses for investors.

But that's poised to change.

The number of refineries in the U.S. peaked in the early 1980s, when more than 300 facilities operated around the country. Most of those plants were so inefficient that when the government deregulated the industry, the sector collapsed to less than half.

Those remaining refineries now run at more than 95% capacity.

Meanwhile, U.S. demand for oil distillates encouraged our neighbors in Canada to develop their enormous heavy oil reserves. We need more capacity to refine that heavy oil. I've focused on several companies that are stepping up to the plate. These are what I call "mini-majors."

These companies are poised to ride the heavy oil wave to major status. "If you're looking for a good, long-term oil investment that has exploration, production, and heavy refining capacity, take a look at Husky, Marathon, or PetroCanada."