The improvement in the US economy, the better numbers on jobs, and the decreased public deficit have caused Republicans, who have little else to focus on, to criticize Obama administration “scandals” such as Benghazi, IRS, and eavesdropping. Despite the merit of the cases, the fact is that important issues – like immigration – have been abandoned. Their goal is now to discredit the administration.
The stock market, after going up for four months, has been volatile, and we haven’t seen the correction that some were expecting. Ben Bernanke’s much anticipated speech this Wednesday will certainly be important in defining what the summer will bring for stocks. Those who didn’t believe that the economy was improving and didn’t participate in the rally were calling it a bubble, and were claiming that the economy and the market were doing well just because of the FED’s monetary policy. Now they contend that the FED might change its policy, which will reduce the liquidity in the market and cause a sellout. I don’t get it. If the FED decides to change its policy, it is because the economy is doing so well that it will not need the help of the FED anymore. If the economy is doing well, companies will perform well and so will the stocks. That is very good news, isn’t it?
South of the equator, in Brazil, it looks like the government is at a loss. The most relevant fact is that the Central Bank took back its role in monetary policy: this was made clear when, in May, despite the announcement of yet another weak GDP, the COPOM increased the interest rate in 0.5bps. Unfortunately the increase in interest rates has not been enough to avoid the capital outflows, pressuring the exchange rate and making it more difficult to fight the persistent inflation. Also relevant was the interview given by Judge Toffoli, from the Supreme Court, saying that the final ruling of the “mensalão” could take up to 2 years. It looks like the 3 powers in Brazil are competing to see who is least trustworthy. This might have something to with the recent awakening of the Brazilian crowds and the protests seen throughout the country.
Although the protests in Brazil need to be better understood, I think that the most important event we are witnessing is the expansion of the shale gas and oil exploration in the USA.
The fact that the USA will be self-sufficient in energy will have a tremendous political and economic impact. In a few years, US exports of gas will modify the balance of power in Europe by diminishing their dependence on Russia and OPEC. Venezuela and Iran will also see a decline in their power. The increased supply will lead to some reduction in price, making the situation on these two countries more difficult, as for different reasons they need to have a price higher than 100$. The IEA forecasts that the oil production in the USA will surpass the production of OPEC and Saudi Arabia in 2020. In a few years, the world will have a very different balance of power. Those who believed in, or even bet on, the end of the American hegemony will have to rethink their thesis.
The United States doesn’t have the biggest reserves but it is in better condition to explore them and has started to do so ahead of others. China occupies the top position on recoverable shale gas reserves but its deposits are located in remote regions where access is difficult. In most places, there is not enough water for fracking and there are regulatory obstacles, problems that the USA doesn’t face.
Brazil occupies the 10th position in terms of shale gas reserves, as we can see on the table below. Given the fact that Brazil has shown no progress on the pre salt exploration, there is no reason to be optimistic with shale gas exploration. Brazil has spent 6 years, since the pre salt discovery, in regulatory discussions, and no advancements have been made in the exploration. The “nationalism” is also a problem and the requirement to have a maximum of 15% in foreign equipment and services only results in higher costs and delays in production.
A recent study of FIRJAM ( Federação das Indústrias do Rio de Janeiro) shows that the Brazilian industry could save almost 5 billion dollars per annum and gain competitiveness if the price of natural gas was the same as in the US. Once again, the same themes come back: lack of infra-structure, transportation, postponements on projects, all of which reduce Brazilian industry competitiveness.
Currently, only Canada and United States are exploring their reserves commercially. Other countries, like Russia, Argentina, China and Mexico, are just starting.
Interestingly enough, shale gas could be considered “clean energy”; to be sure, the level of pollution in the USA is at its lowest level in the last 20 years, which the EPA credit to the increase of gas used as energy source. There are movements against fracking, allegedly responsible for water contamination and emissions prejudicial to public health. The federal and state regulators believe that there is more hysteria than reality to that claim.
Chemical and petrochemical industry as well the steel sector will benefit from lower energy costs. Companies like FEDEX and UPS are announcing fleets powered by gas. Cummins and Caterpillar are also developing products based on gas. The fact of the matter is that the progress on shale gas and oil exploration will redefine the world balance and promote another industrial revolution in the USA.
As an investor it is important to be positioned to benefit from this new world.