I have a confession to make.
Like other market watchers, I’ve spent the last few years digesting the consequences of the financial meltdown of 2008.
In the meantime, I’ve barely paid attention to a more lasting and fundamental shift in the U.S. economy — the emergence of the U.S. economy as the world’s #1 “petrostate.”
This shift has serious implications for where to invest your money in the coming decade.
President Richard M. Nixon first called for U.S. energy independence in 1973 after OPEC’s oil embargo. Forty years later, the United States is well on its way toward achieving Nixon’s seemingly unattainable goal.
Up until recently, U.S. oil production was in serious decline, falling from a peak of 9.6 million barrels a day in 1970 to just under 5 million by 2008. Since 2008, shale oil production in America has soared from 600,000 to 3.5 million barrels per day, pushing overall oil production to 7.4 million barrels a day last year.
The United States has already overtaken Russia as the world’s largest natural gas producer. By 2020, the United States will have displaced Saudi Arabia as the world’s biggest oil producer, pumping 11.6 million barrels a day.
The ‘New American Revolution’
Revolutions can happen at surprising times — and in surprising ways.
Even as Lehman Brothers’ bankers were given pink slips in 2008, small independent oil producers in the United States were furiously adapting the new technologies of hydraulic fracturing (“fracking”) and horizontal drilling to oil.
Fast-forward to today, and the United States has drilled 150,000 horizontal wells costing $1 trillion. The rest of the world together has drilled only about 0.1% of that number.
That’s a surprise.
After all, God only put 15% of the planet’s recoverable shale in the United States. In fact, China has more shale gas than the United States. Russia’s shale oil potential is about 50% higher than U.S. shale oil.
So why is fracking a uniquely American Revolution?
First, fracking is an entrepreneurial venture that thrives in the absence of government interference. It took an independent, wildcatting oil man, George Mitchell, motivated by “enlightened self-interest,” to develop fracking in the first place.
In no other country on the planet do landowners also own mineral rights. Throw in open capital markets — and relatively flexible regulations — and suddenly you have 6,000 small independent oil companies — all competing with each other in trying to make a fortune.
Nicholas Vardy is currently editor of the monthly investment newsletter, The Alpha Investor Letter, which provides longer-term global investments. He also writes two weekly trading services, Triple Digit Trader and Bull Market Alert, which focus on making short-term profits in the hottest markets in the world.