US Energy: Changing Dynamics

Cyber currencies and their underlying technology,  the largely self-imposed drama in the US and UK, and the North Korea's apparent acquisition of nuclear capability are among the significant macro developments this year.   There is another development that like the others was a long time in the making, but seem to have reached a critical mass.  It is the US prowess in the energy sector.    It can have far-reaching political and economic significance.  

The US oil imports continue to fall.  Last week, the US imported about 1.77 mln barrels a day net, which is the least since 1990.  There were some transitory factors, like the problems of  Keystone Pipeline, that may have limited Canadian oil exports to the US.  However, net oil imports for the month as a whole could be the lowest since 1973.  Recall that at its peak 12 years ago this month; the US was importing 14 mln barrels a day.  

The US produced 9.68 mln barrels of oil a day last week.  It is set to surpass 10 mln barrels a day early next year.  Global growth is helping lift US exports, which are almost 6% this year.  Oil exports have nearly doubled and do not appear to have peaked.  It is not just shale either.  Last week, the US also exported 1.21 mln barrels of gasoline a day.  As a byproduct of the oil output, the US natural gas production is also surging and having an impact on prices and exports.   It is indeed conceivable that the US is a sustained exporter of carbon fuels.  

The competitive pressure on other carbon exporters is increasingly important.  While OPEC and the cooperating non-OPEC countries are set to extend their output restraint through the end of next year, there is a concern in some quarters that there is some risk of overdoing it.  A continued rise in oil prices could accelerate US output and put OPEC behind the curve again.    The price of Brent and WTI  have more than doubled off its low set early last year.    Some economists note that US recessions have, as a rule, often follow a doubling of oil's price.  There were a number of false positives when oil doubled not recessions by recessions.  Also, with more production in the US rising faster than domestic demand, perhaps the dynamics are changing.  The US economy has accelerated recently, and appears set to record its third consecutive quarter of above 3% growth at an annualized pace.

The surge in US energy exports has not translated into an improvement in the US goods trade balance.  The advance report on the October good balance was released earlier this week.   It was the second largest monthly shortfall since 2008 at $68.3 bln.  The average goods deficit in 2016 was $61.4 bln.  This year the average is near $65.5 bln.  It is still the early days of the America First rhetoric, but the trade balance is deteriorating despite a synchronized global upswing and above-trend growth in the EU and Japan.  The rise of energy exports helps masked the underlying deterioration of the US trade balance.   

It is worthwhile to consider the factors the allowed the US to cut is net oil imports by 80% or more since 2005.  Many think it might be the luck of geological formations, but there are many other countries who have shale deposits.  Some argue it is American ingenuity.  The technological innovations are indeed impressive.   But that seems to beg the question.  There is nothing natural about technological advances.  It shifts the question to what allowed the technological advances in this direction rather than another direction. 

There are two other considerations that make fracking possible in the US.  First, there an attitude about nature and the environment.  The US refused to sign the Kyoto Protocol and has more recently pulled out the Paris Agreement. The US also seems more accepting of genetically modified foods and organisms.   On a state and local government level, different attitudes in the US are evident.  California appears to be committed to the Paris Agreement and New York State, which has shale fields, has banned their development.  

The second important consideration is the capital markets.  The flexibility of US capital markets, even in the Dodd-Frank era, is impressive. The ability to funnel savings into new enterprises seems unrivaled.  It is the tip of the iceberg as the flexibility of the capital markets assumes a host of relationships below the surface.  It is the abundance of capital.  It is the removal the stigma from bankruptcies and failure.  It is an educational system that allows students to focus on fungible skills rather than industry-specific skills that is more common in part of Europe.  It is a social value ascribed to entrepreneurship.  It is a legal system that favors risk takers over forces of stability and order.  

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