January 2014

A Paradigm Shift in Energy!

Six or seven years ago, the U.S. was very concerned that the balance of payments was showing large deficits year after year. Much was attributed to importing oil from overseas.  Oil production in the U.S. was in decline and the large reserves found in Alaska were beginning to dwindle.  The picture was not good. A byproduct of this was that energy costs in the U.S. were going up, reducing the capital spending of corporations and consumers as they spent more on energy.

This has all changed! The U.S. now has the largest reserves of oil and gas in the world due to new extraction technologies. This is a game changer. Natural gas in particular is important because the use of natural gas has a lower impact on the carbon footprint. For this reason, utility companies are converting to natural gas and moving away from coal. Even more important is that manufacturing costs in the United States, using natural gas, are less expensive than anywhere else in the world. This low cost energy, along with high U.S. productivity, high quality workmanship and a stable government, is driving new high tech manufacturing to the U.S. This has a long-term positive impact on U.S. growth. In the third quarter of 2013, the government reported a growth rate of 4.1%! This is the type of growth you’d expect from a developing country, not a mature country like the U.S.

In addition to the lower costs associated with natural gas, the U.S. is now importing less oil and is actually exporting oil. These changes have had a material impact, reversing the U.S. balance of payments from negative to positive. The U.S. is likely to become energy self-sufficient.  Oil we had been buying overseas is now available for other countries. This change may keep worldwide oil prices in check. The leveling off of energy costs can have a favorable impact on the European and the Japanese economies as well.  

In the U.S., the advantage of gas will be felt the most in areas where pipelines already exist. We will likely see more gas pipelines being built in the future as states realize that they are at a strategic disadvantage without a source of inexpensive natural gas. By the end of 2014, three major new pipelines should be completed, bringing more oil into the state of Texas to be refined. This will have a major impact on the U.S. ability to export more oil.

A year ago, economists were thinking that a growth rate of 3.0% to 3.5% in the U.S. would be the best we could do. Given the results of the third quarter of 2013 at 4.1%, is it possible that the U.S. could be looking at a growth rate of 5% or more in the future? If that happens, the U.S. would have an expanding economy similar to emerging market countries, but with the infrastructure to handle the growth.

The impact of this shift in the U.S. energy position is difficult to predict but I believe we are at the beginning of what could be a major boom period and a return of manufacturing to the U.S.