There's no law in the market that oil and gold have to move together. But when they begin to diverge in a big way, like now, it pays to wonder why. Maybe BHP has the answer. It's put Texas tea on the drinks menu, at the top of the list. So today's Daily Reckoning will journey across the Pacific to visit the great American energy boom looking for answers.
Actually, it's wrong to suggest all the energy action in North America is in Texas. The new drilling technology is unlocking supply from Canada to North Dakota to the Atlantic states.
To get an idea of the North American energy boom, check this out: 2012 saw the largest growth in oil production in US history. That's according to the June release of the BP Statistical Review of World Energy. The oil biz in the US goes all the way back to Colonel Drake in 1859.
To be clear, BP is looking at the figures from 2012. But stepping back from the day to day data and news is probably more fruitful for tracking the big trends.
Here's a curious point: on a net basis last year, the oil market didn't change that much in 2012. Growth was a pretty meagre 1.3%. But in a regional sense, it's no exaggeration to say the oil market is being completely remade, or in the spirit of Joan Rivers, 'reworked'.
A Visual Metaphor For the Oil Market?
You can boil it down to this: US net imports have fallen 36% from their 2005 high. Meanwhile, China accounts for 86% of the growth in net imports in the same period. That's huge. While North America drives the supply boom, China revs the demand.
But the thing that jumped out at us from this report is the fact that oil is actually losing market share. That's as a percentage of global energy consumption. It's at 33.1% and in the 13th consecutive year of decline.
Why that jumped out at us is because nobody seems to be telling the oil traders. The West Texas benchmark hit a 12 month high during the week.
Oil on the Up
Do they know something we don't?
For now, that rising chart looks very lucrative if you happen to be a shareholder in a company operating in the energy business. As we said, one of those happens to be BHP.
They told investors at the Global Metals, Mining and Steel Conference a few months back that a US$1 move in the oil price moves their net profit by 45 million either way. The only commodity with a bigger impact on the bottom line is iron ore.
The brass at BHP maintains that the outlook for iron ore is more robust than the market expects. But they have a pretty handy hedge by having a foot well and truly in the door of the oil and gas industry in the USA.
There's a kind of tussle between the spreading chaos in the Middle East and other oil producing countries against the uplift in production from North America. There might be a big premium to be had for good reserves in countries that are outside the possible danger zones.
That's an idea Dan Denning over at The Denning Report says is worth following. That's largely what he's positioned his readers for. Norway, USA and Australia look a lot less risky and a whole lot more lucrative than Venezuela, Iran or the Sudan when it comes to speculating in energy on higher oil prices.
Of course, you need to have the reserves in place to capitalise if oil does go higher. For BHP, the most exciting prospect today is in the South Midland section of the ancient Permian basin in West Texas.
Apparently it's no exaggeration to say this might be the biggest oilfield after Ghawar, Saudi Arabia. Ghawar has been producing for decades - the biggest 'elephant' oilfield of all time.
You probably already know that the Permian basin can't replicate the cost base of Saudi Arabia. The oil of the Permian is very deep plus hard and expensive to access. But it makes up for it in possible size. It's estimated to be 50 billion barrels. It could be triple that. Nobody knows for sure.
According to the International Energy Institute, the world currently uses 89 million barrels a day. That's 32 billion barrels a year. So the Permian could have over one year of global supply, at least.
That's the industry aspect of it. The geopolitical side is even more intriguing. Take this from the Australian Financial Review on Tuesday:
'[Oil production from the Permian basin] would speed America on its path to topple Saudi Arabia as the largest oil producer, slash US imports, mute price spikes from Middle East unrest and even make substantial US oil exports feasible.'
That's pretty high stakes in anyone's books. That reminds us of something rogue economist Phil Anderson said in his Remembering the Future presentation: lower energy costs thanks to North America (if the Middle East can stay stable) could allow Ben Bernanke to get away with prodigious money printing. Phil argued deflation in energy costs will nullify the inflation of the US money supply. There seems to be some big assumptions in THAT argument.
We suppose there usually is in any investing case. For now, it's telling that the world's largest diversified miner has made oil and gas one of its four major pillars. It might pay for investors to think on similar lines.
for The Daily Reckoning Australia
ALSO THIS WEEK in The Daily Reckoning Australia...
A Two-Faced Shock for the Australian Economy
By Dan Denning
Falling US bond prices are the prime mover in markets right now. As bond prices fall, yields rise. The investment implications multiply. There's one simple way to view rising US rates: it signals the official end of the global credit expansion underway since the early 1970s. That may not sound simple. But it is when you break it down. So let's break it down.
Interest Rates: Something Wicked This Way Comes
By Bill Bonner
The Federal Reserve's EZ money policies will either succeed or fail. Either way, it will be a disaster. If they succeed, interest rates will rise...and America's debt-addicted economy will get the shakes. If they fail, the Federal Reserve will double down with further acts of reckless improvisation - including bigger doses of credit - until the whole thing blows up.
You'll open your electricity bill and see that it's double or even triple what you normally pay. There won't be any good reason for it. It won't be because you've used more power, or because someone's running a dance club out of your living room while you're away at work. It will be the result of specific failures to avert a perfectly predictable crisis.
It's both a tragedy and a story of heroism and cool-headed action under pressure. But what has received little attention so far is the number of innovative materials in the Boeing 777 that helped so many of its passengers survive. Almost all of that advanced technology came from defence research, which leads us to today's topic.
If you already subscribe to The Daily Reckoning, or if you simply found what you read here interesting, then feel free to share our views and insights by posting them to your favourite network, blog or news feed: