Despite all the grumbling by American economists about the Chinese keeping a lid on the value of the Renminbi (yuan), it is not the primary source of economic pain in America today. For this reason, Ben Bernanke's "QE2" policy (i.e. printing money) will not be successful because it does not attack the root cause of U.S. economic weakness. What is the root cause of American economic pain, and how can I make such a confident statement?
The U.S. Commerce Department reported September 2010's trade deficit to be $44 billion dollars. During that month, crude oil averaged around $75/barrel and the U.S. imported about 12,000,000 barrels/day. This means the September 2010 monthly bill for oil imports was roughly $27 billion dollars.
The point is this: out of a $44 billion dollar monthly trade deficit, $27 billion of that was for one commodity alone. Unfortunately for the U.S., it happens to be the most strategic commodity of all: OIL. Put another way, imported oil made up 62% of the U.S. monthly trade deficit. This is not an aberration - it goes on month after month, year after year. And as the price of oil goes up, so too does this problem. It is quite simply draining away the wealth of America. We are burning it up in our cars and trucks.
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So while I have spent the last 5 years trying to convince Americans and American policymakers that natural gas transportation was the solution to the problem, I realize now the real problem is that the American Congress, as well as its economists and financial media, are in complete denial about the imported oil crisis. Everyone knows the first step to solving a problem is to understand the problem. And this is why the Federal Reserve and American economists will fail in their attempts to revitalize the U.S. economy. They simply refuse to own up to the blatantly obvious fact that the American economy is built on a very badly constructed foundation: it is at the mercy of foreign oil to power it.
Further, the problem is going to get much worse before it gets better. I am a firm believer that worldwide oil production will not keep pace with worldwide oil demand given a functioning worldwide economy. What we will see in the future is not very hard to predict:
- the American economy will begin to strengthen and gather steam
- oil prices will rise as oil demand increases with the strengthening economy
- the American economy will peter out as high gasoline prices pummel the consumer
- inflation, higher unemployment, higher fiscal and trade debts will follow
- the currency will, over the long haul, continue to weaken
In other words, the American economy is now completely dependent on the price of the most strategic commodity of all (oil) and the fact that it must import 65% of its consumption.
Meantime, a solution is also staring us in the face - natural gas transportation.
A quick glance at the two charts above reveals a very powerful economy reality. The price of oil today is now 2.5x what it was in 2003. The price of natural gas is about the same. As I have said many times before - the abundance of natural gas in the world along with the realities of worldwide oil supply/demand fundamentals has completed shattered the historical oil to natural gas ratio. This ratio is now completely meaningless as the price of oil will continue to march higher, while the price of natural gas will remain relatively stable, and if not stable, will certainly rise much slower than the price of oil. Since 1995, the ratio of oil to natural gas has averaged around 9. Today, with oil in the mid-$80's and natural gas around $4, the ratio is over 20.
With America's abundant natural gas shale reserves, as well as conventional gas from Alaska and the GOM, this news should be a most welcome economic development. Add to this the mature and extensive American natural gas pipeline system, and you have an economic advantage that no other country in the world is blessed with. Even Chinese energy policymakers have said they would immediately switch to natural gas transportation if they had the natural gas pipeline system of the U.S. However, instead of it being our #1 economic advantage, the refusal of the U.S. Congress, economists, and mainstream financial media to acknowledge and publicize the imported oil crisis keeps the natural gas story a much neglected secret. If it were not for Boone Pickens, the majority of Americans would not even be aware of the foreign oil crisis and natural gas transportation. Nothing gives more proof that American energy policy is in crisis. As I have said before, Energy Secretary Chu should be fired for being agnostic about natural gas transportation, and President Obama should be an one-termer since he has also refused to embrace America's most abundant, clean, and cheap fuel. What is wrong with these men and did they not take oaths of office? Sigh.
The U.S. could very easily adopt natural gas transportation and reduce foreign oil imports by 5,000,000 barrels/day within 5 years. This would save the country not only $400,000,000 a day (assuming oil is at $80, but I assure you oil will be higher than that in 5 years), but it would also enable Americans to refuel their vehicles (at home) with natural gas at less than half the price of gasoline derived from foreign oil ($1.20 GGE natural gas today compared to $2.75/gallon gasoline). However, the economic gains would be much greater than these numbers due to the multiplier effect of keeping/saving this money in the U.S. and having it ripple through the consumer sector. In addition, hundreds of thousands of well paying jobs would be created in the energy, automotive, and industrial sectors as a result of reindustrializing the United States around its abundant natural gas resources. Such a reindustrialization effort would pay dividends to all Americans for decades into the future and usher in an age of economic prosperity few today can even imagine.
I suppose it is not to be. The oil companies own Congress and they are protecting their gasoline profit margins with everything they've got. One has to wonder if the American CEOs of Conoco (COP), Exxon Mobil (XOM), and Chevron (CVX) ever feel guilty and lose sleep over their efforts to keep natural gas transportation out of the reach of their fellow Americans? It's as if they somehow believe there will not be a market for oil in the future were the U.S. to adopt natural gas transportation. I have a message to these CEOs: there will ALWAYS be a market for oil. With India and China buying gasoline powered vehicles as fast as they can, believe me, you are safe. So, why not leverage your huge investments in Burlington Resources and Origin (GM:OGFGF) (are you listening Jim Mulva?) and your huge investments in XTO and Qatar (are you listening Rex Tillerson?) and embrace and support natural gas transportation for America? After all, it is not only the right thing to do economically and environmentally and from a national security perspective, it is the right thing to do patriotically and also for the long-term financial health of your companies.
Now some will say, hey Fitz, China relies on foreign oil as well.
Ah, but the difference is this: China can pay for it. Not only is China's trade balance healthy enough to pay for their foreign oil bill, they have enough left over to buy American debt (that is, pay for the U.S.' foreign oil imports...) and also to scour the world buying up oil reserves. And this is the biggest issue going forward for American oil companies: they must try to finance oil reserve acquisition on their own and they are competing against state backed Chinese oil companies. Add to that the oil reserves that are simply off limits to American oil companies and what do you have left for them? Answer: natural gas. It's abundant the world over, it's cheap, and it's clean.
But alas, Ben Bernanke, Congress, and the oil executives don't see it this way. So we are left with "QE2".
Fitzsimmons' 1st Law of Economics:
"QE2 (i.e. printing money) => lower U.S. dollar => higher oil prices => more economic pain for America"
So, what are investors or people of high net worth doing? One - they are buying gold and silver. I actually don't think this is to "make money", I think high net worth investors are surveying the landscape today and thinking, man, U.S. policymakers simply do not know what they are doing. I need to preserve my wealth and would I rather have paper dollars or gold and silver bullion? No brainer. This is not Obama specific, it actually started during Bush's first term. Let's look at a gold chart:
So, gold was around $300/oz when George Bush came into office and was over $900 when he left. That is 3x in 8 years. As my readers know, this is not only because George Bush doubled the U.S. debt in 8 short years (and that's not counting the two oil wars that were "off budget") , but because of the huge spike in oil prices during Bush's regime.
Fitzsimmons' 2nd Law of Economics:
"Oil is Now, and will Remain, the World's Reserve Currency of Choice"
You see, the price of gold cannot be blamed on the falling dollar alone. The dollar has not fallen nearly as much as gold has risen. This is because the so-called "world's reserve currency of choice" is actually the opposite: there is no choice (at least today). So, money flocks to the U.S. dollar during times of crisis as the recent financial crisis, the Euro-crisis, and the Korean peninsula crisis have proven. However, this too will change as many countries are tired of bone-headed U.S. energy, economic, and foreign policy and are unanimously recommending a move away from the U.S. dollar. The U.S. strategy appears to be to keep the world in a constant state of chaos so that such a move is not possible, or at least will surely not go smoothly. U.S. policymakers may be in denial about the oil crisis (actually, they are well aware of it, they are just paid to keep their mouths shut), but they definitely know that the U.S. would not be able to pay for its foreign oil imports were the dollar not the reserve currency of choice (that is, if they were not able to sell the paper issued by the U.S. Treasury Department).
So what are investors to do? As I have said ad-nauseum: buy gold and silver bullion and oil company stock.
Ironically, as much as I love to harass Jim Mulva of COP for not embracing natural gas transportation in order to leverage the company's huge investments in that arena, COP remains one of my favorite investments in the oil patch. COP produces over 1.7 million BOE/day. At $80/barrel - you do the math. In addition, the chemical business is twice as profitable as last year and downstream refining and marketing is up 3x. The company sold a stake in LukOil (OTCPK:LUKOY) for $6.4 billion and has another 50 million shares up for sale. The company is generating close to $1 billion in profits every month and has said it will target more profits toward stock dividends and share buybacks. The dividend today is 3.6%. The company is an excellent value at today's $60/share. Five years from now, when oil is over $150/barrel, investors will look back and say man, I wish I owned some COP.
They will also say, the Fitzman was right - Americans should have transitioned over to natural gas transportation.
Disclosure: Long COP