Why You Should Care About Gas

I’ll admit it:   My post on natural gas a few days ago was pretty long and loaded with data.    (https://terryliebman.wordpress.com/2016/04/11/this-is-quite-interesting/).  Perhaps too much?

So here’s an idea:  I’m going to start each new blog – from today forward – with two (2) new features:

1. Why you should care:  Here I’ll tell you – quickly, precisely, succinctly – why this issue is important to you.  How it will affect the economy.   Inflation.  Interest rates.  Investments.  Or life in general.
2. Taking action:  Here I’ll share what I plan to do, or have already done, as a result of the information presented.  Please know my intent is not to give investment advice.  Only to share my thoughts and ideas -and, perhaps, actions.

Two brief summaries.  Then, in THE BLOG itself will be the facts, the detail, the analysis, the explanations, all intending to support the two summary comments above.   Make sense?

Let’s give this a shot:  Why should you care about the explosion in natural gas exploration and extraction?

Why you should care:  Energy is the single most important ‘thing’ in our world.  And US oil production is now shrinking.  At $100 or so per barrel, technology joined opportunity and exploration/production exploded.  But no longer.  US production is down and falling…not rapidly, but trending down…and will continue to do so for the foreseeable future.  Combine declining production with growing global demand and the possibility of a ‘production freeze’ resulting from this weekend’s meeting (about 15 nations, OPEC and non-OPEC, all major oil producers) in Doha, or some future meeting, and it’s clear there’s significant upward pressure on global oil prices.

Unless global natural gas production – and the use of natural gas as an energy source – expands at an even faster rate.  Which it appears to be doing.  This will have the effect of slowing and muting (no, not elimination…just slowing) the rise in global oil prices.

This is not a quick change…but a very long term trend.  It’s impacts will be widespread and will be felt in US and global inflation rates, US and global GDP growth rates, and by extension, interest rate trends.

Taking action:  As oil prices lift, values of oil investments and investments somewhat derivative of oil will lift as well.   If one wanted to take advantage of the oil price movement, take a look at USO, VDE and XOP.   All three are up in the recent past…and I would expect this to continue as prices rise.  On the other hand, if you prefer getting paid for waiting, consider two of the midstream MLPs that I own:  PAA and ETP.   Both are massive pipeline companies…one oil, one gas.  And both have a current dividend yield above 12%.   I know these investments have a moderate degree of downside risk, but I feel I’m being paid for that risk.

THE BLOG:  I’ll keep this short…as much of the data has already been presented.

We all need 3 things to survive: Food, clothing and shelter. All three require energy to produce, light, temperature control, etc.   Energy is the cornerstone of our existence.

Today, over 80% of all energy consumed globally comes from oil, natural gas and coal.   Coal use will diminish over time.  The other energy sources have either limited scalability, lack popular/political backing, or are at present simply too expensive to implement on a mass scale.

I have no doubt this will change over time.  Companies like Tesla, and the other Elon Musk company, SolarCity, have the potential to change the world.  But not quickly.

Which suggests energy demands – at least for the forseeable future – will be satisfied by oil and natural gas.

Which means energy supplies, demand and cost are critically important to any economic discussion.  In my next related blog I’ll talk about the impact of oil prices on inflation…and inflation expectations.

Let me know what you think of this new format.  Like it?  No?  Share your thoughts.

• Terry Liebman