Personal Finance: Some good news about oil

Return to 1973: the Vietnam War ended, gasoline was 40 cents a gallon, and the United States was the world’s largest oil producer, pumping nearly 10 million barrels per day. Those of a certain age will mark that year as the beginning of our long national energy nightmare, as domestic production commenced its relentless decline while OPEC began solidifying its stranglehold on global supplies.

Fast forward 45 years, and it’s not just a new chapter but a completely different book. As of August, the world’s largest producer of crude oil is (drum roll please): the United States. For the first time since Richard Nixon was president, American oil output exceeded that of both Russia and Saudi Arabia, a feat that practically no one dared imagine just 10 short years ago.

The about-face was as dramatic as it was unexpected. During the mid-2000s, U.S. production fell by half to 5 million barrels per day, with steady waning expected to continue indefinitely. Instead, the shale revolution unleashed a literal flood of oil beyond even the most upbeat musings. As recently as February, the International Energy Agency predicted the US would reclaim the title of world’s largest producer by 2023. Incredibly, output zoomed past 11 million barrels per day, and America regained the crown by Labor Day. The United States is now poised to satisfy more than half of all the world’s future growth in demand. J.K. Rowling would be hard pressed to concoct a tale so fanciful.

It’s easy to forget just how much the price of oil (and the cost at the gas pump) once dominated geopolitical considerations in the Middle East. But consider this: Saudi Arabia is now facing the possibility of sanctions over the ghastly Khashoggi affair, while the White House has renewed an oil embargo against Iran. Yet even faced with potential supply disruptions from the two biggest OPEC producers, a glut of oil persists, and the price has sagged by 20 percent since September. In days of yore, the price shock would have been similar in magnitude, but opposite in direction and gasoline prices would be soaring.

Another little recognized but critically important benefit of the shale bonanza is the dramatic reduction of our dependence on imported oil to power the economy. Recessions and wars have proceeded from our dependence on foreign sources of energy. No longer. In 2006, nearly two-thirds of our total domestic demand for crude and other petroleum liquids was imported, much of it from sources one might deem less than friendly. By August of 2018, net imports had plummeted to a 60-year low of just 19 percent, half of which comes from Canada and Mexico.

Of the remaining imports, just 9 percent now emanates from Saudi Arabia. In fact, it is now technically possible for the U.S. to become entirely energy self-sufficient; economics rather than production capacity determines the balance. American Gulf coast refineries were designed to process heavier imported grades of crude oil, while the gusher of shale production is a lighter variant. It is actually cheaper in some instances to import and refine heavy crude than to retool for the lighter variety. Remarkably, the U.S. now exports more than 5 million barrels of oil per day and in fact exports more than it imports when refined products such as gasoline are included. Astonishing.

While this felicitous turn was unexpected, the conditions necessary to spawn it are hallmarks of American capitalism. The confluence of private ownership, access to capital, implacable ingenuity, and the opportunity for profit conspired to produce a revolution that benefits everyone. It’s a great lesson to remember next time you fill up.

Christopher A. Hopkins, CFA    
Vice President and portfolio manager
Barnett & Company


Chris Hopkins

Chris Hopkins, CFA, is Vice President and Portfolio Manager for Barnett & Company. He is a native of Whittier, California and has lived in Chattanooga since 1988. He began his career in finance in 1998, following twenty years in manufacturing management. Chris joined Barnett & Company in 2004. He served for twelve years an adjunct professor of Finance at UTC, and writes a weekly column for the Chattanooga Times Free Press on finance and economics. He is currently president of the CFA Society of East Tennessee, and is a member of the North Carolina and South Carolina CFA Societies as well as the National Association for Business Economics. He presently serves as city council representative on the Chattanooga fire and police pension board, and is member of the finance committee for the AIM Center. Chris holds the Chartered Financial Analyst (CFA) professional designation. He received Bachelor’s degrees in Physics and Economics from California State University at Fullerton, and earned his MBA from the University of Tennessee at Chattanooga.
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