Editor's note: S&A founder Porter Stansberry has called this megatrend "the biggest investment opportunity of [his] lifetime."
Few analysts have been writing more (or longer) about how new drilling technologies are unleashing vast amounts of oil and gas reserves in the U.S. – changes that will allow the U.S. to rival Saudi Arabia as the world's top oil producer.
In today's Master Series essay, we feature the first of a two-part interview Porter gave to Karen Roche of Streetwise Reports. Originally published December 13 in Streetwise's Energy Report, Porter's interview touches on the best investment opportunities created by the trend… why you can be "bullish on production and bearish on price"… and why politicians are likely to screw up this opportunity for an economic boom in our country…
Porter Stansberry:
End the Ban on U.S. Oil Exports, part I
By Karen Roche, The Energy Report
The Energy Report (TER): As a history enthusiast, Porter, to what extent do you believe technology has changed investing?
Porter Stansberry: The future will be unlike the past in every way related to technology, but it will be exactly like the past as it relates to people. Technology changes a great deal, but people don't. You can count on politicians to be scumbags and most people to be lazy. But as for investing, technology gives far more people access to information.
Only one person in the world knew the actual price of a high-yield bond 25 years ago – Michael Milken – and he made a fortune with that information advantage. Today, everybody has access to trading information. Everyone has access to price.
In general, technology has made finance a smaller-margin business. It's led to enormous scale in our financial institutions, which is the only way they can really survive. But fear and greed are still the underlying forces that drive the markets, and investors are just as subject to irrational emotional decisions as they've ever been. I don't expect technology will ever change that.
TER: Getting specifically into energy… a few weeks ago, the International Energy Agency World Energy Outlook (WEO) said the U.S. would become the world's largest oil producer, overtaking Russia and Saudi Arabia, before 2020. Then, Goldman Sachs said it would happen by 2017.
PS: They stole my thunder. I've been saying 2017 for maybe a year now. If Goldman is saying 2017 and IEA is saying 2020, it will probably happen in 2016.
TER: How will the geopolitical and socioeconomic landscape change when the U.S. becomes the largest oil producer?
PS: One of the biggest drags on the U.S. dollar over the last several decades has been the trade deficit resulting from petroleum imports. That's going to largely disappear, though not completely because we'll still need some petroleum imports for certain flavors of crude. As for exports, considerable legal hurdles remain.
We have archaic laws about oil because we had long believed that oil was a strategic resource and that the world was going to run out of it in the short term. Unless we change our laws to allow exports of crude oil, none of this magnificent new supply is going to aid our economy at all.
In fact, we'll have a terrific glut of oil, and we're already at record levels of storage. The price hasn't collapsed yet because unrest in the Middle East is causing fear to inflate the market price. But the price will absolutely collapse if we don't allow for oil exports. The entrepreneurs who brought us this incredible new supply would, in that scenario, suffer. And many companies would go bankrupt because the oil industry is not capitalized to survive $50/barrel oil.
But to answer your question – how the geopolitical and socioeconomic landscape will change when the U.S. becomes the largest oil producer – I'd have to know the unknowable, which is how or if oil policy will adapt. So far, it doesn't look good. So far, 12 companies have applied for licenses to export liquefied natural gas (LNG), and only one license has been granted. I don't think the Obama administration is ever going to do anything to help the domestic oil industry. And I think that the result will be a price collapse and an oil glut that will harm our economy.
TER: You mentioned one company has a license. Who is that?
PS: The Department of Energy granted a conditional permit to Cheniere Energy Inc. (NYSE MKT: LNG). It's an ironic story. For many years, I was a short-seller in the stock. In fact, I published an article in 2006 when the stock was trading between $30 and $40 per share. I wrote that this company's business model was beyond stupid and had ventured into insane territory. Its plan was to import LNG into the United States and the company built a $6 billion facility, the Sabine Pass LNG Terminal, to bring in natural gas from Qatar. I said it was insane because not only was the U.S. on the verge of a huge glut of natural gas, but for decades, the U.S. had either the largest or second-largest reservoir of gas anywhere in the world. So the U.S. importing natural gas is like Saudi Arabia importing sand. It doesn't make any sense.
Of course, natural gas prices collapsed, and Cheniere almost went bankrupt. It saved itself by selling new equity to a very smart group in New York, Blackstone Group. With the money raised from Blackstone Group, Cheniere switched that facility from imports to exports and applied for an export license long before government officials thought any market for U.S. export gas would materialize. Cheniere got lucky.
TER: To what extent will manufacturing and petrochemical industries move to the U.S. to take advantage of cheap natural gas prices?
PS: There's roughly $40 billion worth of construction going on in the chemical industry. You'll see the same kind of growth in fertilizer. You're also going to see huge growth, which hasn't really started yet, in refined products. Imagine it this way: If the government won't allow exporting energy in the form of crude oil, then you can damn well bet that entrepreneurs will find a way to export that energy in some other form.
Fertilizer is energy-rich and easy to ship, so we'll have a huge boom in domestic fertilizer production.
How about propane? There's no law against exporting propane. Targa Resources Corp. (NYSE: TRGP), a company we recommend, is expanding its Mont Belvieu import/export complex to boost propane export capacity.
The funny thing is the energy will find a way out of the country. That'll be good for our economy, but it's so inefficient. We'll have enormous investments in all these industries surrounding the energy complex that are much lower margin. It would make so much more sense to just export the oil.
TER: But wouldn't bringing in more production manufacturing have the additional advantage of creating jobs?
PS: Yes, but it's not the highest and best use of our time, our capital, or our people. This is something important about economics that people do not understand at all – comparative advantage. The U.S. has enormous comparative advantage in lots of different industries. Manufacturing is not one of them. Neither are giant refineries. Yet that's what we'll be stuck with.
TER: What would change the equation?
PS: There's really no easy answer. It's mind-boggling. Imagine for a moment where Saudi Arabia would be today if it hadn't exported its oil. It could have a huge petrochemical business and be the world's leading producer of fertilizer and plastics. But guess what? The fact that Saudi Arabia put its resources to their highest and best use made it one of the richest countries in the world.
TER: So maybe we should export oil rather than gas.
PS: Absolutely. To make natural gas our main export energy source would cost trillions to build enough of these terminals and it would take decades. Why not just hook up a pipeline of crude oil to a tanker and be done with it? Natural gas is so clearly better suited for domestic energy needs. We should export the crude and use the gas domestically, but that's not what will happen. We'll end up with higher prices on domestic crude with very little export and that'll be disastrous.
Editor's note: As we said, Porter is perhaps the most vocal proponent of the oil and gas production boom going on in the U.S. right now. And not only does it have the potential to create vast new wealth in America… but it's also going to bring incredible power to the politicians who dictate who can produce the oil and where they can transport it. To read more of Porter's work on the topic, click here.