This will have a huge impact on how you invest in the sector.
As the new balance emerges, we will see a realignment of global energy prices, and both the sourcing and use of energy will open up significant opportunities worldwide.
We are already beginning to see the revisions working themselves out among the world's most developed nations.
Yet this time around, the changes will have the most positive effect on those regions usually left out of the picture. These regions have the lowest economic diversification, relying largely on sporadic, inefficient, and ecologically damaging energy sources.
Because of high pricing considerations - prompted by collapsing power generation, rusting refineries, and deteriorating delivery infrastructures - people in developing countries are usually cut off from market expansion taking place elsewhere.
In spite of such problems, these countries will provide major demand increases going forward, resulting in significant changes to the international market landscape.
And a damaging cycle that's been churning for half a century will begin to break down...
Profiting From Misery
This cycle emerges from the normal way in which the developed world profits from the misery of the developing world.
The U.S. is a good example; with less than 5% of the world's population, we nonetheless have managed to use some 25% of global energy.
It is how that usage plays out, however, that has kept most of the world's population dependent upon such dominant markets. Previously, rising energy prices have been pushed onto those who can least afford it. As a major factor in all manner of costs from agriculture to manufacturing, energy has usually been the brake applied to market expansion in developing countries.
Rising energy costs have been the bane of developing countries for more than half a century, providing the single most pronounced restraint on economic progress and even life expectancy.
Take only one example and you get the point of this vicious cycle: The single greatest cause of sickness worldwide is polluted water. The basic reason why the water cannot be cleaned is the lack of sufficient, reliable, and affordable energy.
Meanwhile, the most developed and industrialized countries were provided with the luxury of time. Rather than make difficult decisions at home, Washington (or London, Paris, Brussels... take your pick) would effectively pass on the inflationary pressures to the less advantaged, requiring painful decisions to be made elsewhere.
A One-Way Current of Inflationary Pressures
Until recently, major nations knew the damage of inflation would hit other parts of the world first. The primary capitals would rely on other guys having to bite the bullet and restrain rising energy demand or risk destabilizing local currencies and commerce.
This has been especially true of the U.S., which had had the added advantage of seigniorage (the advantage gained by a nation whenever others are obliged to use its currency). This is what provides a decisive benefit for the dollar. Not only is the primary trading currency and asset store internationally, cross-border energy transfers are denominated in it.
As more greenbacks are required to service trade and capital flows abroad, the U.S. benefits from what is essentially an interest-free loan. It allows Washington to print money that remains in foreign banks to support ongoing cross-border financial and fiduciary requirements.
That had dictated a one-way current of inflationary pressures, away from American shores and toward places where currency support is difficult at best. Other nations were forced to put the brakes on improvement, adding to the misery of billions while allowing us to go our mauling merry way.
These Three Factors are Breaking the Cycle
The situation began to change with the combination of three main factors. The first was the aftermath of a worldwide credit crunch, essentially prompted by the implosion of American real estate values and the derivatives based upon them. This shock moved as a financial tsunami across the map, devaluing dollar-denominated assets everywhere.
The meltdown fundamentally changed the reliance on the dollar as a store of value. More nations began pegging their own on a basket of foreign currencies. In the petrodollar market, experiments began with other currency bases for trade and new crude oil benchmarks more closely paralleling the actual grade of oil traded. That led to a further decline in the NYMEX West Texas Intermediate (WTI) benchmark and its direct connection to the New York market.
The imploding real estate bubble had least impacted less developed nations - where there were fewer assets are held in dollars. True, the richest in these countries would hold their wealth in hard currency assets offshore and were hit hardest. But average folks were insulated from the worst of it because of an unlikely ally: their abject poverty.
The second factor that contributed to a breakdown in this cycle was the declining value of the dollar relative to other currencies. This not only hit the exchange rates against the euro, yen, or even the Chinese yuan (renminbi) and Korean won, but also resulted in a strengthening of currencies elsewhere. The traditional exporting of American dollar-denominated inflationary pressures was less significant than in years past.
Third, led by the dynamos developing in China, India, East Asia, and even emerging in parts of sub-Saharan Africa, the new wave of industrialization has a different texture altogether. True, some of it continued to reflect a policy of import substitution - replacing the drain on hard currency assets for import purchases with locally-produced products. But more of this development was singularly geared to competitive advantage in a changing global marketplace.
This is important for a couple of reasons. It is not merely a reliance on inferior domestic goods to offset genuine demand, so it's not as prone to the failure of previous attempts to use import substitution as a "trade barrier." This time around it has a more pervasive goal.
You see, in many parts of the world, the new industrialization is broader-based. Governments, who previously would sacrifice local expansion in fear of inflation, now cannot easily do so without figuratively shooting themselves in the foot. And the lower relative value of the dollar makes the problem less onerous.
Which brings us back to energy price realignment.
There will still be the occasional spike from geopolitical events or temporary market aberrations, and a crisis now and then is inevitable. But this pricing movement will gradually open up leverage for developing nations.
I have already begun sketching how an individual investor moves into this brave new world, in which cross-border opportunities will be highlighted.
More to come. Stay tuned.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.