RODNEY’S RAVINGS take an open-minded and at times irreverent look at topical economic
issues. Unlike our pay-to-view reports that are for the eyes of subscribers only, the RAVINGS
are free and you may forward them to other people. You can signup to the RAVINGS on our
website – http://www.sra.co.nz/lists/. The same distribution list is used for the Property
Insights reports and for notification of forthcoming seminars and property market reports.
RODNEY’S RAVINGS
The US oil and gas “revolution” has major global implications
EXECUTIVE SUMMARY
It is time to take the US oil and gas boom and especially the shale gas “revolution” seriously. It is hard to
say how much it will boost US economic growth because of a range of unknowns, but it has the potential to
have a significant impact. The US government will be a significant beneficiary via increased oil and gas
royalties. It should contribute to energy self-sufficiently for the US. The dramatically lower gas prices are
boosting international competitiveness for a number of US industries (e.g. chemicals, plastics, aluminium,
iron and steel, rubber, coated metals, and glass).
Slashing US imports of petroleum products and boosting US economic growth is stage one. Gas prices
outside the US haven’t fallen in response to the dramatic tumble in US natural gas prices. US gas prices
are now so far below international prices there is a strong incentive for US producers to export. This should
depress global gas prices and undermine to some extent the competitive advantage currently available to
US related industries. BHP has a stake in the US shale gas market and is considering exporting US
liquefied natural gas to Asia. In addition to undermining the competitive advantage currently available to
the relevant US industries, exporting US gas (and coal) could be a death blow for some of the planned gas
developments in Australia and elsewhere. There will no doubt be other implications.
Info about shale gas in the US was presented in a March Raving that in the first instance showed where NZ
had got to in becoming self-sufficient in energy (see http://www.sra.co.nz/pdf/OilandGasMar12.pdf).
Rodney Dickens
Managing Director and Chief Research Officer
Strategic Risk Analysis Limited
[email protected]
www.sra.co.nz
© 2012 Strategic Risk Analysis Limited. All rights reserved.
November 2012
While Strategic Risk Analysis Limited will use all reasonable endeavours in producing reports to ensure the
information is as accurate as practicable, Strategic Risk Analysis Limited, its employees and shareholders shall
not be liable (whether in contract, tort (including negligence), equity or any other basis) for any loss or damage
sustained by any person relying on such work whatever the cause of such loss or damage.
1
Shale gas is starting to be a game changer in the US
West Texus Oil Price vs. US Natural Gas Price (USD)
Source: w w w .indexmundi.com
600
160
Natural Gas, left scale
500
140
West Texas, right scale
120
400
100
300
80
60
200
40
100
20
0
0
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
The adjacent chart shows how much the advent of
shale gas has resulted in US natural gas prices
falling relative to the West Texas oil price. Without
the advent of shale gas, the natural gas price could
be around USD 300 rather than around USD 120.
This gives some idea of the “revolution” that shale
gas is starting to drive in the US.
The International Energy Agency predicts the US
will surpass Saudi Arabia as the largest oil producer
in five years and that the US will be self-sufficient in
energy by 2030 (see the first link below). The boom
in US oil and gas production is largely the result of
accessing reserves in shale rock using hydraulic
fracturing and horizontal drilling.
A US oil and gas guru describes the advent of shale gas a “revolution” (see the second link below). It is
about much more than energy self-sufficiency for the US. Tumbling gas prices have greatly improved the
international competitiveness for a range of US industries:
“The American Chemistry Council says the shale gas has reversed the fortunes of the rust bucket
industries like chemical, plastics, aluminium, iron and steel, rubber, coated metals, and glass. And this has
spread to a raft of other industries and it is one of the forces that have been driving US share prices. Many
manufacturing plants are being shifted out of China back to the US.” Source: the second link below.
http://www.nytimes.com/2012/11/13/business/energy-environment/report-sees-us-as-top-oil-producer-in-5-years.html?_r=0
http://www.businessspectator.com.au/bs.nsf/Article/Hurricane-Sandy-shale-gas-US-economy-Rio-Tinto-BHP-pd20121031ZKSC3?opendocument&src=idp&emcontent_asx_financialmarkets&utm_source=exact&utm_medium=email&utm_content=125119&utm_campaign=kgb&modapt=commentary
I can’t quantify how much especially shale gas will reinvigorate a range of US industries, but the major
impact the US oil and gas revolution is expected to have on US self-sufficiency in energy is starting to be
evident in the international trade data (aided by increased energy efficiency).
US imports of oil, gas, coal and related petroleum products (henceforth petroleum products) have started to
disconnect from the oil price (left chart). The left chart shows a reasonably close relationship between the
West Texas oil price and the annual value of US petroleum product imports. Contrary to past behaviour,
the latest increase in the oil price hasn’t driven up US petroleum product import payments because the US
is starting to replace imported product with local production. At face value US petroleum product imports in
the year to September 2012 were around USD50b lower than should have been the case based on the oil
price. US exports of petroleum products have started to significantly outperform the oil price (right chart).
At face value the right chart suggests that US exports in the year to September 2012 were around USD65b
higher than should have been the case based on the oil price. These are ballpark figures.
US Petroleum Product Imports vs. West Texas Oil Price
550
500
Source: US International Trade Commission
350
300
250
200
240
Annual imports, $b, left scale
100
West Texas Oil Price, $, annual
average, right scale
80
140
120
100
60
40
150
100
Source: US International Trade Commission
160
450
400
US Petroleum Product Exports v.s West Texas Oil Price
120
Annual exports, $b, left scale
West Texas Oil Price, $, annual
average, right scale
210
180
150
80
120
60
90
40
60
20
30
20
50
0
0
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
0
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
While Strategic Risk Analysis Limited will use all reasonable endeavours in producing reports to ensure the
information is as accurate as practicable, Strategic Risk Analysis Limited, its employees and shareholders shall
not be liable (whether in contract, tort (including negligence), equity or any other basis) for any loss or damage
sustained by any person relying on such work whatever the cause of such loss or damage.
0
2
The US is still a major importer of petroleum products, with imports exceeding exports by USD300b in the
year to September 2012, but net importers were around USD150b lower than should have been the case
given the increase in the oil price since 2009 in ballpark terms (left chart). USD150b is a ballpark figure but
is equal to almost 1% of US GDP (i.e. the impact of the infantile US oil and gas revolution is starting to
become of national economic significance). The right chart puts US net petroleum product imports in the
context of the size of the national economy, with net imports still equal to 1.9% of GDP in the year to
September 2012. If US net imports of petroleum products falls to zero it will add almost 2% of US GDP, but
this is just the direct contribution from falling imports and rising exports. It doesn’t take into account the
potentially more important secondary factors (i.e. growth in US industries using the much cheaper gas; the
boost in revenue for the government from royalties that will make it easier to solve the fiscal deficit and
government debt problems, and reduce the need for fiscal austerity; the increase in general spending
flowing from the jobs and incomes created in the industries using cheaper gas).
US Net Petroleum Product Imports v.s West Texas Oil Price
US Net Petroleum Product Imports v.s West Texas Oil Price
Source: US International Trade Commission
500
Source: US International Trade Commission
120
3.5
Net Imports, $b,
left scale
100
3
West Texas Oil
Price, $, right
scale
80
450
400
350
300
250
2
100
100
West Texas Oil
Price, $, right
80
60
1.5
40
20
50
0
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
Net Imports, % of
GDP, left scale
60
200
150
2.5
120
0
1
0.5
0
Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
40
20
0
The map below from the US Energy Information Administration (EIA) shows how wide spread shale gas is.
Uncle Jed could have been rabbit hunting and accidently shot a seam of national gas over much of the US.
While Strategic Risk Analysis Limited will use all reasonable endeavours in producing reports to ensure the
information is as accurate as practicable, Strategic Risk Analysis Limited, its employees and shareholders shall
not be liable (whether in contract, tort (including negligence), equity or any other basis) for any loss or damage
sustained by any person relying on such work whatever the cause of such loss or damage.
3
There is considerable uncertainty over how much shale gas will boost US natural gas production in the
future. This link - http://www.eia.gov/energy_in_brief/about_shale_gas.cfm - is to a useful report on the EIA
website that puts shale gas production in the context of total US gas production, quantifies how much shale
gas production might increase (a huge range for the estimates), and gives some background info on shale
gas extraction. There is considerable scope for debate over how large an impact US shale gas will have on
the performance of the US economy, but it is time to be aware of it and to take it seriously.
Potential global implications of US shale gas
The link below is to the report about BHP exporting US natural gas and undermining Australian LPG
projects (you may have to sign up for the free daily news updates to access this report). Asia seems likely
to be the first part of the world that could be impacted. The charts below might be of some relevance in this
context. The left chart shows how dramatically higher Indonesia liquefied gas prices are relative to US
natural gas prices. The right chart shows that the movements in the Indonesian liquefied gas price
normally lags changes in the US oil price by three months, although I don’t know why the gas price has
outperformed relative to the oil price since late 2011.
http://www.macrobusiness.com.au/2012/11/bhp-set-to-finish-off-the-miningboom/?utm_source=Media+List&utm_campaign=5b74072635-RSS_DAILY_MAILCHIMP_CAMPAIGN&utm_medium=email
Gas Prices (USD)
600
500
Source: w w w .indexmundi.com
US Futures Price *,
left scale
Indonesian Liquified Gas Price vs. West Texas Oil (USD)
450
160
400
140
350
400
Indonesia Liquified
Price **, right scale
300
100
450
Indonesian Liquified
Natural Gas Price *,
right scale
350
400
300
80
250
60
200
200
200
150
100
100
* USD per thousand cubic meters
** US per cubic metre
50
0
0
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
500
West Texas Oil, Adv.
3 mths, left scale
120
250
300
Source: w w w .indexmundi.com
Correlation = 0.89
150
40
100
20
* USD per cubic metre
50
0
0
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
Russia is the major supplier of natural gas in Europe. The left chart shows the dramatic gap that has
opened up between US and Russian natural gas prices. The right chart shows that Russian natural gas
prices remain closely in line with the oil price, with it taking six months on average for the natural gas price
to respond to changes in the oil price. I don’t know whether US liquefied gas might end up being exported
to Europe because of the huge price differential, but if it isn’t it means energy-hungry industries in the US
will continue to have a huge advantage over the equivalent European industries. The IEA “estimates that
electricity prices will be about 50 percent cheaper in the United States than in Europe.”
Russian Natural Gas Price vs. West Texas Oil (USD)
Natural Gas Prices (USD)
600
500
Source: w w w .indexmundi.com
Russian Price
600
500
US Futures Price
160
140
120
400
400
300
300
200
200
100
100
100
Source: w w w .indexmundi.com
Correlation = 0.97
West Texas Oil, Adv.
6 mths, lef t scale
700
600
500
Russian Natural Gas
Price *, right scale
400
80
300
60
200
40
0
0
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
20
* USD per thousand cubic meters
100
0
0
Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14
While Strategic Risk Analysis Limited will use all reasonable endeavours in producing reports to ensure the
information is as accurate as practicable, Strategic Risk Analysis Limited, its employees and shareholders shall
not be liable (whether in contract, tort (including negligence), equity or any other basis) for any loss or damage
sustained by any person relying on such work whatever the cause of such loss or damage.
4