I have a confession to make.
Like other market watchers, I've spent the last few years digesting the consequences of the financial meltdown of 2008.
In the meantime, I've barely paid attention to a more lasting and fundamental shift in the U.S. economy -- the emergence of the U.S. economy as the world’s #1 “petrostate.”
This shift has serious implications for where to invest your money in the coming decade.
President Richard M. Nixon first called for U.S. energy independence in 1973 after OPEC’s oil embargo. Forty years later, the United States is well on its way toward achieving Nixon’s seemingly unattainable goal.
Up until recently, U.S. oil production was in serious decline, falling from a peak of 9.6 million barrels a day in 1970 to just under 5 million by 2008. Since 2008, shale oil production in America has soared from 600,000 to 3.5 million barrels per day, pushing overall oil production to 7.4 million barrels a day last year.
The United States has already overtaken Russia as the world’s largest natural gas producer. By 2020, the United States will have displaced Saudi Arabia as the world’s biggest oil producer, pumping 11.6 million barrels a day.
The ‘New American Revolution’
Revolutions can happen at surprising times -- and in surprising ways.
Even as Lehman Brothers’ bankers were given pink slips in 2008, small independent oil producers in the United States were furiously adapting the new technologies of hydraulic fracturing (“fracking”) and horizontal drilling to oil.
Fast-forward to today, and the United States has drilled 150,000 horizontal wells costing $1 trillion. The rest of the world together has drilled only about 0.1% of that number.
That's a surprise.
After all, God only put 15% of the planet's recoverable shale in the United States. In fact, China has more shale gas than the United States. Russia's shale oil potential is about 50% higher than U.S. shale oil.
So why is fracking a uniquely American Revolution?
First, fracking is an entrepreneurial venture that thrives in the absence of government interference. It took an independent, wildcatting oil man, George Mitchell, motivated by “enlightened self-interest,” to develop fracking in the first place.
In no other country on the planet do landowners also own mineral rights. Throw in open capital markets -- and relatively flexible regulations -- and suddenly you have 6,000 small independent oil companies -- all competing with each other in trying to make a fortune.
Meanwhile, any shale reserves in Russia, China and Brazil would be exploited by a handful of state-owned enterprises. And the only ones to get rich would be the (usually corrupt) bureaucrats running them.
Second, global rivals are taking themselves out of the race before the starting pistol has fired. France has banned shale oil production. Germany has placed a moratorium on it. The United Kingdom has drilled only a single well.
Third, it's a happy accident of geology that most U.S. reserves are in low-regulation states like Texas, Oklahoma and North Dakota.
If all of the United States were like New York or California, which stand essentially where France does, there would be no energy revolution in the United States.
Energy as a Game Changer
Energy booms matter to a country’s prosperity. Left wingers in the United Kingdom love to argue that it was the discovery of North Sea oil -- and not Margaret Thatcher’s free-market revolution -- that allowed it to emerge from under the long shadow of the Second World War.
By 2020, the U.S. “fracking” revolution will have added 2-4% to gross domestic product (GDP) and created twice as many jobs as what automobile manufacturing provides today.
The “fracking” revolution has shifted the U.S. energy landscape in ways not thought possible as recently as a decade ago.
First, fracking puts to bed the “peak oil” argument that doom-and-gloomers trotted out for decades about the inevitable collapse of the U.S. economy. (Don’t worry... there are plenty of other arguments left.)
Second, a new energy boom creates millions of new, well-paid jobs -- 3 million by the end of the decade. And if the White House ever approves the Keystone pipeline, that number could grow by another 140,000.
Third, energy bills will fall as cheap gas replaces coal and oil. U.S. natural gas prices are already one-third of their level in Europe and a quarter of that in Japan. Gas costs could drop by 30%, putting $750 more in the pocket of the average U.S. household. Efficiency gains in the fracking sector are improving and pushing the long-term price of oil down toward $50.
Finally, without oil as its hostage, OPEC loses the stranglehold it had over U.S. foreign policy. The future price of oil and gas won't be determined by whether it's a friendly government sitting on oil or gas supplies. Instead, it'll depend on the manufacturing costs of extraction.
How to Make Your Fortune in Energy
Five years ago, the Western oil majors were focused on developing oil reserves in far-off and unstable lands. Emerging market energy giants were the most valuable companies in the world. In July 2007, Gazprom (OGZPY) head Alexei Miller boasted that the Russian natural gas giant would be the world's first $1 trillion market cap company. PetroChina (PTR) beat it to the punch, hitting that level by November 2007.
Today, Gazprom would have to rise over 10x to reach its goal. PetroChina is down almost 80% from its peak. Brazil's Petrobras (PBR) -- which spent billions on the right to explore offshore oil -- is the best of the bunch. And its five-year chart isn't pretty, either.
The bottom line?
Stay away from these lumbering emerging market dinosaurs.
The fracking revolution will unleash a tidal wave of small energy companies that are destined to generate the biggest, most lasting gains in the energy sector in the years ahead.
In case you missed it, I encourage you to read my e-letter column from last week on Eagle Daily Investor about what a leading economist says about why you lost so much money in China. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
NOTE: Global Guru Capital is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Financial Publications.
Nicholas Vardy, CFA
Editor, The Global Guru
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P.S. This month’s Alpha Investor Letter recommendation includes my #1 bet on how to profit from the United States as the world's new #1 “Petrostate.”
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