Crunch! Oil is down, down, down.
Such is the coverage I’m sure you don’t need me to elaborate much more than the basic facts.
Oil dropped below US$30 a barrel this week for the first time in 12 years.
That’s a 70% drop since June 2014, according to Bloomberg.
Some commentators suggest the latest fall is based on concerns on growth in China. Others point to the coming supply from Iran. Everyone takes it as a given that the Saudis are trying to break the frackers in the US.
We can never be sure about anything. Here’s one thing I do know.
Only three to four years ago — maybe even earlier — many commentators thought energy assets good protection against central bank monetary policies.
The lesson keeps coming every year: markets never do what we expect. Don’t take anything for granted.
But actually, I found a different energy story more compelling than the headline news about oil.
It’s one reason I’m still positive on economic growth despite the gloomy headlines.
Read on to find out why…
‘The 290 metre tanker steaming through the Gulf of Mexico’
That’s how the Financial Times described the Energy Atlantic this week.
The tanker is now part of US energy history. The consequences for the world could be huge.
Here’s why. The tanker will carry the first cargo of US gas for export from the ‘lower 48’ States.
It will collect the gas from a US$15 billion dollar terminal in the Gulf of Mexico on the Louisiana coast.
I’ll give you an idea of how totally and utterly unexpected this energy export development from the US was.
Bloomberg reports that a fleet of tugboats the terminal runs have been idle for seven years. That’s because they were designed to escort shipments of gas being imported to the US.
To quote the article:
‘“The boats are beautiful — you could eat off the floor in the engine room,” said Richard Ennis, head of natural resources at ING Capital.
‘With the switch to exports, the tugs will at last have a job to do — even if it’s not the one they expected. They “may actually get a scratch on them,” Ennis said.’
The imports never arrived because they were never needed. The shale revolution in the US has sent US gas supply skyrocketing.
Now the US is going to become a major gas supplier to the world.
The Financial Times estimates that by the end of the decade the US is likely to be the world’s third largest exporter of LNG, after Qatar and Australia.
The price is right — for consumers
There is so much LNG in the world right now that it’s a third of the price it was two years ago in its two largest markets, Japan and South Korea. It’s even cheaper in Britain.
That doesn’t leave much profit margin for the US exporters after their costs are taken into account.
That’s their problem.
As far as you and I are concerned — and the rest of the world’s consumers — energy is seriously cheap.
It’s going to hold down costs across the entire world. This is very bullish for economic growth.
Some mainstream economists have got the idea that deflationary trends like this somehow imperil the economy with a downward spiral.
Somehow they’ve lost sight of the fact that bringing down the cost of living is what markets are designed to do.
And markets would do it always, if governments didn’t interfere.
What could be more positive for economic growth than consumers with more money to spend after they’ve covered the cost of food and shelter?
What could be better for companies’ profits than to lower their costs?
Harnessing the power of cheap energy could set off an industrial boom.
Ignore the doomsayers
Now, make no mistake. Oil producers, explorers and all the companies and trades associated with the energy industry are hurting. They will keep hurting.
Energy prices are unlikely to rise anytime in the near future and help their bottom lines.
Bad debts will most likely rise in this sector for the US banks, too.
All of that is true. That’s going to bring out the bears. They’ll be a lot of warnings about collapse and chaos.
The rocky start to the year in stocks certainly gives them the platform to be heard even louder right now.
Here’s what you know already: stocks are volatile. Every down week doesn’t mean 2008 is coming again.
Don’t forget Bastiat’s lesson on the broken window. The energy industry will be visibly hurting.
What the mainstream won’t report on so loudly is all the industries and people that benefit from low energy prices.
Just for starters, it will keep inflation down, and therefore interest rates low.
Low costs, low inflation and low interest rates are a cocktail that historically lead to one place: boom times.
Over at Cycles, Trends and Forecasts, we’ll keep saying the same thing.
The world’s never looked this bullish since the industrial revolution.
Associate Editor, Cycles, Trends and Forecasts
Ed Note: This article was originally published in Money Morning.