The International Energy Agency’s suggestion that the US could be the world’s largest oil producer by 2020 has prompted some breathless analysis of America’s shale boom.
That is a big claim but not one that I’d dismiss out of hand. The numbers speak for themselves. Shale gas accounts for 30pc of US gas consumption, compared with just 1pc in 2000. In just four years, the US has gone from being the world’s largest importer of gas to being largely self-sufficient.
Net (Xetra: A0Z22E - news) petroleum imports to the US declined from more than 13m barrels a day to 8m between 2007 and 2011. For the first time in 60 years, the US is a net exporter of refined products. Energy (NYSEArca: JJE - news) independence is a realistic prospect for the US within two decades.
The existence of large amounts of hydrocarbons trapped in layers of sedimentary rocks has been known about for many years. Only recently, however, have developments in horizontal drilling and hydraulic fracturing (or “fracking”) made these deposits commercially viable. Crucially, the US has the world’s best combination of positive factors its big domestic gas market, pipeline infrastructure, water availability, technical know-how and supportive regulations to allow shale to transform its energy landscape.
These competitive advantages matter because while China has plenty of shale it is short of water to extract the oil and gas. Europe (Chicago Options: ^REURUSD - news) is unlikely to allow a fracking free-for-all because of the greater environmental concerns and population density.
To describe this as a game-changer is not overstating it. The implications are significant, not just for the US economy, but in geo-political terms, too. What, for example, might the US’s strategic interest in the Middle East be if its economy is no longer hostage to a shutdown of the Strait of Hormuz?
The Fifth Fleet’s protection of the sea lanes in the Persian Gulf comes with an estimated price-tag of $60bn to $80bn (£38bn to £50bn) a year. What more productive use might that sort of money be put to?
Shale turns on its head the entire energy debate. Ever since Shell’s M. King Hubbert predicted in the 1950s that US oil production would peak in 1971, energy policy has been premised on scarcity; now it’s all about abundance. In the US, shale has positive implications for all the main contributors to economic output: consumption (because of lower energy bills); investment (in drilling technology and industries that could benefit from lower input costs); and net exports (if only because of lower energy imports).
For investors, the most significant factor is the massive competitive advantage the US has been gifted by the widening gap between the cost of natural gas in America and the rest of the world. Gas is expected to be 50pc to 70pc cheaper in the US than in Europe and Japan (EUREX: FMJP.EX - news) , which means lower costs for electricity generation, cheaper fuel for industrial plants and lower feedstock prices across a whole swathe of industrial processes from chemicals to fertilisers, steel and plastics.
The immediate consequence of this has been a surge in investment in US factories and the repatriation of manufacturing from lower-cost countries in Asia and Latin America. Chemicals (Euronext: SCH.NX - news) plants that couldn’t hope to compete when gas was $14 per thousand cubic feet a few years ago are suddenly hugely profitable at $2.
Whole industries like the manufacture of plastic toys, thought lost forever to US-based companies, have been made viable once again by shale. That, in turn, creates opportunities for other ancillary businesses.
But the winners and losers will not be evenly spread, so the importance of research and stock-picking cannot be overstated. Likely beneficiaries include energy explorers with significant shale assets such as Pioneer (Berlin: PIO.BE - news) Natural Resources; oil services companies with expertise in fracking such as Schlumberger (NYSE: SLB - news) and Halliburton; refiners like Valero that will benefit from cheaper feedstock; pipeline manufacturers such as Williams Brothers; and chemicals companies like Eastman.
On our side of the pond, Weir Group is an engineering company with interests in the hydraulic pumps used in shale rigs, while Elementis (Berlin: E3E.BE - news) makes chemicals to cool drills during the extraction process.
Who would have predicted that America’s salvation would be an industrial renaissance?
Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63