Tuesday, September 09, 2014

Shale Gas Plays Into the Dollar Dance

CNBC continues to pump those all time high announcements to its dwindling audience. Men on the street are not feeling the joy. It feels weird. Anyone out there 100 years old? Is this what the Interwar Period felt like? We have enough similarities. This fourth turning crisis period is taking time for our modern, ADD audience. I anticipate a dollar crisis. it will come from an external shock of some sort, but with the way the system is now, those exporters who stockpile or recycle dollars can keep stockpiling gold and tangible items (even land). The current garbage dollar regime suits them as long as they can amass money. Eventually, the primary reserve currency crown will be taken away and the petrodollar retired. One thing missing from my estimates and from some analysis is the role of shale oil production.

The shale oil revolution has boosted American oil production to decade highs. That supply expansion combined with our economically depressed consumption (demand destruction), it has caused our daily import number to shrink drastically. Crude oil imports are down 28% from 2005-2006. That is huge on the global market for oil with regards to price as Asian demand has steadily grown since then. A bidding war would push prices up, pushing prices up would increase our oil import bill. If the US oil import bill were to reach 2005 levels in dollar terms, we would have problems. Our trade deficit has the non-petroleum component and the petrol component since we are a major oil importer. Shale production is keeping that number down. Shale production right now is dependent on expanding debt, and the wells have a quick depletion rate. Forbes had a great article on the shale gas play running on cheap debt and fumes. The FED's ZIRP mindset causes malinvestment, and the wizards of Wall Street just pick which idea to boost (telecom, internet, housing, internet 2.0, shale gas). Following the last two links, unserviceable debt will lead to shut downs of wells, which will drop production, which will cause our oil import bill to rise due to physical needs. If we were blowing our trade deficit out further while running huge federal deficits, the other players in the dollar system might revolt.

It is what happened in the early '70s. The shift away from dollars through the 2000s was an echo of that. Kissinger had to create the petrodollar to maintain US supremacy of the system. What is there for a next step? What is the replacement to the petrodollar that was a replacement to gold exchangeability that was a replacement to the gold standard? The Anglo-American bankers do not seem to want a gold standard. The bankers and their crony puppets in the USG, World Bank and IMF are trying to maintain their spot on top of the global hierarchy, but it does not look good for them. If the shale miracle or revolution peters out, watch those annual oil production numbers. Scientists might answer the debate topic of the shale technology change just pulled future supply forward or if it unlocked entirely new production. If the oil import bill climbs in size, the game could be nearing a new phase.


Anonymous said...

Ok, so let's assume that the new anti-dollar is a gold-backed currency (at least in part).

Is it wise in the short and medium term to buy physical gold?

Long-term, it's obviously a wealth preserver.

But do you think it likely that those who buy gold now will be labeled as traitors / have it confiscated / face penalties when our "enemies" create a new gold-backed currency to unseat the dollar?

For example: you have $100 every month in change to invest in either physical gold or another durable good (tools. bottles of whiskey. books on how to build and maintain wood-gas generators).

What's your split?

Anonymous said...

Here I thought the person behind 28 Sherman was NOT a Russian nut like Zerohedge.

Since the beginning of July the dollar index has gained almost 6 percent.

It will continue to gain as interest rates rise, encouraging all our capital pumping up Emerging Markets to come home.

Son of Brock Landers said...

1st anon - precious metals are 10% of my stuff.

2nd anon - good one. If the fed slowly steps rates up what will those dollars run into? Repatriation of dollars should create a crack up boom in some asset.

Anonymous said...

First, the "problems" of shale oil revolution described in your post fail to consider exporting "fracking" technology to other nations so they can pump out natural gas, decreasing the cost of imported energy (if our wells were to go bust) to America and helping our trade deficit. The steep decrease in oil prices if everyone (including Ukraine) is pumping shale oil will have a knock on effect to our broader economy, boosting the dollar against all major currency pairs.

Second, the argument that SO much malinvestment is occurring in the shale gas sector will destroy and vanquish the US Dollar as the global reserve currency is extreme. There can be malinvestment without destroying and vanquishing our nation. After all, the Internet bubble did little to stop people from holding dollars and most did not say, "Geez, Pets.com went bankrupt, I must now put all my assets in Renminbi."

I do agree the world is changing with geopolitical concerns.

The one thing America can do in a changing landscape is to raise interest rates over a long period of time, encouraging investment to come home. Instead of propping up a new bubble, the investment can go towards a variety of things, including manufacturing or the tech behind manufacturing, new small businesses, new technology, new consumer products and green energy companies. You are absolutely correct in saying high interest rates will have a "crack up boom" in some assets, but the "crack up boom" will "crack" oil and gas prices, gutting Russia and the emerging nations.

- 2nd Anon

eah said...

There simply is no alternative to the USD on the world stage today. Nor will there be anytime soon.

Long-term, it's obviously a wealth preserver.

Why "obviously"? Do you have proof of that?

This page has a few charts. If you give credit to the charts, whether or not Au is a "wealth preserver" seems to depend on which span of time you look at.

Anyway, it looks like you could be unlucky and Au would not be a "wealth preserver" at all during your lifetime.

I personally have no interest in owning Au.

Anonymous said...

Rats leaving the fracking ship (?):