The US has overtaken Russia and Saudi Arabia to become the largest producer of crude and natural gas liquids (NGLs) in the past six months, reports Bank of America Merrill Lynch (BAML) Global Research in a note entitled ‘The United Petrostates of America’.
BAML notes that domestic US natural gas prices have ‘stayed at a fraction of international cartelized prices on the back of the shale boom’. The report says benefits to the North American industrial sector have been mixed, with some areas like light manufacturing seeing only modest gains. “On a state-by-state analysis, we observe a strong relationship between US employment gains and oil production growth during the last five years. Similarly, we note that wage gains have been strongest in states with large oil output gains during the same period.”
Oil & gas investments in the US are at the highest levels ever
Money flowing into the oil and natural gas sector is now close to 20 per cent of total US private fixed structure investment, said BAML, the highest level ever in US history and almost as high as residential investment. “While this is partially caused by a slowdown in residential constructing spending, the level itself has risen to nearly $200 billion a year recently and is continuing to rise. This represents a major aggregate shift away from what is essentially a durable consumption good (housing) to a durable production good (oil and gas wells).
US inflation dynamics remain heavily influenced by oil
“As we look at US inflation expectations (five-year breakevens) pre and post shale oil boom, inflation drivers seem to have shifted from labour market slack and consumer prices to production slack and concerns about inflationary fiscal policy. But the impact of oil prices has remained strong in both periods. In fact, much of the normalization of inflation expectations after 2009 can be traced back to the rally in oil prices.”
As such, the recent run up in five-year forward Brent from a low of $87 to a recent high of $99/bbl, should be a concern to inflation hawks. But to those collecting wages in America's petrostates such as North Dakota, Colorado, or Texas, it is just music to their ears.
Disruptions linked to engineering or geopolitics have plagued global oil producers in recent years while the underwhelming return on investment achieved by oil majors in some of their international projects has also brought about a major reduction in capex.
The American shale revolution has had a transformational effect on the US and global economies in recent years. American oil production has expanded by 70 per cent since bottoming out in 2008, as has natural gas liquids (NGLs) output, while natural gas output has grown by 40 per cent since shale gas drilling picked up in 2005. As a result, America has overtaken Russia and Saudi Arabia to become the largest producer of crude and other liquids in the past six months. Similarly, the US outpaced Russia as the world's largest producer of natural gas in 2010,” said BAML.
American foreign energy dependency ratios have collapsed
With supply vastly outpacing demand growth, seaborne liquid natural gas imports (LNG) into the US have collapsed and crude oil imports have mirrored the vast increases in domestic production. Consequently, says BAML, America has moved from being heavily dependent on foreign fuels heading into the financial crisis in 2008 to spending less than 1.5 per cent of national income buying foreign oil and gas.
