Shale: An Ace in the Trade War

For upwards of 100 years, oil has been the world's preeminent energy source. For much of that time, until the late 1960's, America was the foremost producer and exporter. Then, thanks to a prolonged period of over-regulation and price controls, domestic demand finally exceeded supply. Subsequently, Americans watched and suffered as Saudi Arabia, Iran, Iraq, Venezuela, et al (aka OPEC) dominated the price conversation. The former USSR and Russia, too; though they were not members of OPEC.

Jimmy Carter engaged in global hand-wringing over this situation, as well as the Iranian hostage crisis, and it cost him a second term in the White House. He's a nice man and very smart, but on this he was misguided and mistaken. Ronald Reagan did a little better. He gradually deregulated oil prices and suddenly, though temporarily, there was a glut of oil. America was still importing, and still reliant on OPEC, but the energy industry was re-invigorated.

Chief among the new energy innovators was George Phydias Mitchell. Mitchell was the son of an immigrant Egyptian sheep herder, and he just happened to graduate first in his class (Valedictorian) at Texas A&M University. (He was also captain of the men's tennis team, and an Army officer in WWII.) It was he who invested hard earnedfortune and sacred honor in developing the technology we now call hydraulic fracturing (fracking). Mitchell died in 2013 at the age of ninety-four, but refinements of his techniques have made the fields of west Texas so prolific that pipelines and truck drivers can't keep up with production. America is yet again an oil and gas exporter, and no long dependent upon OPEC, or anyone else. If you add in coal and nuclear capacity, we are energy independent. And then some: Un-intimidate-able!

Impressive, don't you think? But, that's not all. Most of America's newfound oil is a product of George Mitchell's shale (hydraulic fracturing) revolution. So, say what you will about fracking - and the process gets safer, cleaner, cheaper, and more efficient every day - shale oil is the lightest, sweetest, cleanest oil on the planet. Bar none. It's easier to lift, to transport, and refine than any other oil. China and many other countries buy it to blend with heavier, dirtier oils to make those oils easier to refine. Which brings me to the punch line:

China's imports from the U.S. are only about one fourth of American imports from China. Yet, in July, China threatened to impose a 25% tariff on oil imported from the U.S. (I remind you that I am a free-trade purist, and I think President Trump's obsession with tariffs is not in America's best interest. No doubt we're playing on a field that has long been tilted against us, but, well never mind.) My point is this: The Chinese threat is absolutely empty, even if they actually follow through. They still need to buy the oil from someone, and if we sell ours elsewhere, they get a dirtier, more expensive product than they could have gotten from us.

I think President Trump could achieve equitable trade agreements for American business - both exporters and importers - with a less bombastic style, and importantly without tariffs and the threat of tariffs. The futility of China's oil threat typifies the problems they have. Likewise Europe and almost every other American trading partner. We have the oil, they don't. Oil from shale isn't the only ace in this game, but (Please forgive the pun; it's too easy, and I'm weak.) it trumps all the others. 

Until next week,

PATIENCE, DISCIPLINE, and CONFIDENCE in the FUTURE! mh

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.

The opinions expressed in this material do not necessarily reflect the views of LPL Financial.