History is littered with transformational changes resulting from new discoveries, inventions, and technologies. Over the past several years there have been significant energy‐related technological improvements which have the potential to be truly transformational in terms of the impact on our decades‐long dependence on imported oil and changing a geo‐political dynamic that has been in place for nearly 50 years.
In days gone by a crisis in the Middle East caused the price of oil to shoot higher and economic prospects to be impacted negatively. It has been interesting to see the price action in the energy market and the impact on the US economy in the face of the most recent conflict and escalation of hostilities in the Middle East. In fact, Brent crude is actually cheaper today than it was three months ago and new highs in the equity markets are signaling no adverse impact on the US economy. What makes today different than in years past? Our dependence on Middle East oil has been greatly diminished as a result of a huge North American energy boom. Today the US imports more oil from Canada than from all the major oil producers in the Middle East. Furthermore, US energy production is climbing at a record pace and satisfying a greater and greater percentage of our domestic energy needs.
The Return of the American Energy Boom
It’s been a long while since the words “America” and “energy production boom” have been used in the same sentence, but that is exactly what’s happening today. The Energy Information Administration (EIA) has reported that not only has the US oil production renaissance decreased our reliance on imported oil, it has also successfully stabilized world oil prices. Strong energy output is expected to grow rapidly over the next few years from the Bakken, Eagle Ford, and Permian regions. Coincident with this growth in supply, US energy demand is expected to increase only slightly. Multiple data points confirm that the current growth of domestic energy production will ultimately lead to energy independence, perhaps sooner than we ever thought possible. In fact, many economists and energy experts believe that America could be energy independent by 2020.
The obvious question is how did the energy dynamic change so quickly? The answer is twofold. First, technology‐driven improvements in horizontal drilling and hydraulic fracturing (fracking) have not only facilitated the discovery of new fields, but also served to dramatically increase production in fields whose reserves were either thought to be unrecoverable (reserves trapped in shale formations and in deep‐water locations) or exhausted. The U.S. Department of Energy (DOE) now estimates that our current reserves provide us with a 90‐year supply of natural gas! In just the past decade, America has gone from an expected importer of natural gas to potentially the world’s largest exporter of natural gas.
In order to ship natural gas around the world, it must be converted to liquefied natural gas (LNG). Once converted, it can be shipped via tanker all around the world. Even though the U.S. does not currently have sufficient infrastructure (LNG export terminals) to export natural gas on a broad scale, many projects are currently under construction and/or awaiting DOE approval, with the first terminal expected to come online by 2015. Eventually, LNG exporting could be a boon for the U.S. economy resulting in increased local and state revenues from taxes and licensing and increased demand for workers to construct these terminals. Moreover, an increase in exports will allow for a much needed reduction in our trade deficit.
How The US Energy Renaissance Impacts Investment Strategies
Importantly, the energy production boom is impacting other sectors of the economy that are dependent on plentiful and inexpensive natural gas. For example, according to PwC (PricewaterhouseCoopers, LLP), while the U.S. manufacturing resurgence has benefitted from rising labor costs in markets such as China and South America, cheap and abundant domestic energy are playing a more prominent role in the decision by manufacturers to re‐shore or on‐shore to the U.S. Even the agricultural sector has been impacted as domestic fertilizer businesses realize the competitive advantages of an increasing supply of cheap natural gas. The US energy renaissance is creating a growing supply of energy and an increasing need for energy-related infrastructure to collect, store, and transport the product.
This dynamic has created some very interesting investment opportunities. While a number of our Telemus model portfolio investments are positively impacted by the growth in US energy production, none more than our investments in the energy MLP (Master Limited Partnership) space. We have made a “passive” investment in the Alerian MLP Index (AMJ) and an “active” investment in Salient MLP & Infrastructure II (SMLPX), both of which have meaningfully out-performed the equity markets in 2014i. Moreover, Salient has proven to be among the best in the MLP space with a number one ranking for the 3, 6, and 12 month-periods ending June 30, 2014. We believe that our investments in energy infrastructure have been well-placed and will likely be part of the portfolio as long as the current dynamic in the US energy markets remains in place.