By
Charles
Armstrong
:
The big news in energy last week was that the International
Energy Agency projected the United States will overtake Saudi
Arabia as the world's leading oil producer by 2020. If accurate,
the significance of this information is hard to overstate, and its
ramifications for the economic, military, and political future of
the world are myriad and complex. In theory, at its most basic,
this means cheap oil and an end to foreign energy dependence. But,
as you'd expect from so multiplex a commodity, it's not that
straightforward. In deed, the forthcoming U.S. oi l production boom
is nothing short of a geo-eco-political imbroglio.
Chart taken from WSJ.com
From a market point of view, the first consequence one would
expect would be for crude to become a demand-driven market. If w e
have all the oil we need from sea to shining sea, supply would play
less of a factor on the price of a barrel than would the demand to
burn it up. As such, a few interesting investment plays present
themselves. A supply glut almost always means a decrease in the
price of the underlying commodity. As such, if you believe the
IEA's report to be accurate, shorting a long-dated crude oil
futures contract, such as January or February 2014, (CLF14, CLG14,
respectively) would make sense as an investment in the future
decline of crude prices. Alternately, since they do
such a terrible job tracking the actual price of
oil,
shorting a long oil ETF, such as [[USO]], would accomplish the same
goal, and provide additional returns in the form of a roll-yield
bonus as long as the futures curve for near contracts remains
normal (in contango).
That said, the pressures on the oil market are not as simple as
basic supply and demand. For the price of a good to accurately
reflect those pressures, the market has to be open to all
participants - a market can't operate (or at least maintain
liquidity) without scores of individuals buying and selling.
However, it turns out the oil market is much more constraint-laden
than other global commodity markets (rice, lumber, coffee, etc).
There are a few reasons for this. The first, which I didn't know
until after this story broke (and which became the impetus for my
writing this piece), is that the United States generally prohibits
exports of crude oil. That's right, America, bastion of free
markets and free men, generally disallows the exportation of one of
the planet's most basic economic inputs. (This, I have to assume,
is one of the many reasons why Brent Crude, a somewhat inferior
British grade of oil, has for the last couple years been trading at
a price significantly higher than its American counterpart, but
that's a topic for another day.) While it isn't technically
illegal
to ship crude offshore, regulators certainly don't make it easy. As
far as I understand (and someone please correct me if I'm wrong),
any exporter of American crude is required to get dispensation from
the Department of Commerce, and even then the exporter is highly
restricted in his or her trade.
The other major piece of the puzzle is theU.S. m ilitary
presence in the Persian Gulf.
NPR had a good story last week explaining the
situation
. The gist is, for decades now, the U.S. h as kept several aircraft
carriers permanently stationed in the Persian Gulf specifically for
the purpose of keeping oil shipping lanes open, protected, and
safe. Not coincidentally, theU.S. an d her allies get a ton of
their oil from countries whose continued exports rely on open,
protected, safe shipping lanes. Heretofore it's been a win-win, but
if the U.S. no longer needs foreign oil, then what interest would
we have in protecting the shipping lanes of other nations,
especially when every other oil consumer (China, India, Brazil,
etc.) directly benefits from the U.S. military presence in the
Persian Gulf. (Anyone planning to run for president in the next
four elections: I've just given you the sort of military policy
that would likely resonate with about half the population.)
Okay, you might think, so the Middle East would become more
unstable (if that's possible) without a permanent U.S. military
presence, what has that got to do with the price of oil if we're
extracting all we need domestically? Consider a world in 2025
whereU.S. oil exports remain strictly regulated, nations in the
Persian Gulf must allocate tremendous expense to secure shipping
lanes, and the Peoples' Republic of China has a fully modern
economy with a healthy appetite for petroleum products. You've now
created two entirely distinct international markets for oil,
nurtured a hidden economy built on piracy and black markets, and
functionally turned the United States into a global oil cartel. In
this fertile breeding ground for militarism, the newly modern
navies of the world would swell to protect oil access, conflicts in
crude producing nations would flare up like oil fires, and all the
while theU.S. (whose oil consumption has incidentally been falling
and will likely continue to fall) sits on an ocean of oil,
unwilling to share and unable to profit from its export.
On the other hand,theU.S. co uld lift entirely its restrictions
on crude exports (treating crude the same way we treat almost every
other commodity on the planet). In so doing, American crude would
compete with Middle Eastern and other geographic varieties of oil;
nations would have less incentive toward militarization as crude is
more readily available; the global economy would grow as more
countries are able to modernize on the back of readily accessible,
transparently priced energy; and, most important to any commodities
investor, the price of oil would reflect, simply, the price of
oil.
I realize that in the course of this piece I have not addressed
the very real need to switch to renewables. This is obviously
tremendously important for the future of our planet, our
environment, and our continued existence as a species, but theU.S.
wo n't hasten a fully green economy by extorting other countries
and forcing them into war-mongering. As America moves forward, she
should not cling to cold war ideas about resource protection and
paranoia; this is the land of the free, after all. Our markets
should be likewise.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
See also
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on seekingalpha.com