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“When historians write this story 10 or 20 years from now, they are going to look at a very different U.S. Everything has changed.” That was the forecast of Philip Verleger, energy sector guru and former director of energy policy at the U.S. Treasury Department, in an article published this week.
Energy Investors, Beware!
Your investments in the energy sector have the potential to go south before you realize what is happening. Over the last five years, 15 European oil refineries have closed. At least one more is set to follow this year. This could be just the tip of the iceberg for the sector as the U.S. oil production industry redefines and, shall we say, “refines” itself? We may be standing at the brink of a worldwide disruption of oil discovery, production, and distribution, and a potential re-distribution of wealth. It’s already happening as a result of the U.S. government’s easing of restrictions on oil production in country.
In March 2011, U.S. President, Barak Obama said the the U.S. would reduce crude imports by 33% by 2025. When the president makes a promise that won’t be fulfilled for 15 years, the general responses are, “Ho hum” and “Yeah, right.” Considering that no one expects this president to keep his promises, very few people actually listen to him anyway.
Surprise!
Well, my friends, it has already happened. While the tree-huggers are doing their best to stymie the recovery of oil by fracking, the U.S. has experienced a 39% increase in oil production from its own soil since 2011, the year of Obama’s announcement. I’m not sure that the average person can grasp the impact. It becomes far more compelling when one realizes that this is just the third of the proposed 15 years of growth.
Although most people don’t see it yet, the U.S. is putting the problems of being an oil-dependent nation (in terms of having to depend on other countries for its supply) in the rear-view mirror. The states of Texas and North Dakota are now pumping twice the amount of oil that they were in 2011. In fact, Texas is now pumping more oil that all of Iran. As production increases in the U.S., the need for oil from other countries decreases, potentially crippling not just companies, but entire economies. Put Venezuela high on that list. Oil imports from Nigeria, for instance, have declines by more than 60% in the past three years.
Balance of Power and Trade
We have not yet arrived at the point where fracking has completely eliminated the U.S. need for foreign oil, but it appears that it will not take nearly as long as most of us had imagined, assuming that we had imagined it at all. When it changes, economic and diplomatic strategies will change also. The U.S. demand for oil exceeds its own requirements. The U.S. is only one of the countries that is refining crude to ship to China to supply its seemingly unquenchable thirst. My point is that it now appears that the U.S. may be able to break free from the need for foreign oil, not only for itself, but to be able to gain a significantly greater share of the Chinese market with its own refined product. That alone could erase the U.S. trade deficit with China.
Back to the Beginning
Investors need to raise their awareness. We are talking about a potential major shift in the energy sector. I see no reason to fear, but I recommend a heighten caution and more intense scrutiny when investing in energy stocks for now and the foreseeable future.
