A phoenix rising from the shale gases

The shift in economic power from the west to the east is a well-documented trend. The proxy for such analysis tends to be a comparison between the two super-powers of the respective regions: the decline of the US (representing the west) versus the rise of China (representing the east).

However, reports charting the demise of the US seem very premature as the unconventional drilling for shale gas breathes new life into the country’s economy.

While Europe remains mired in long-term structural decline, North America seems to be steering a more successful path through the most devastating economic dislocation since the 1930s. The US has a history of such reinvention; their dominance of the internet being a good example. The undisputed leadership of Apple, Microsoft, Google, Intel and IBM, in their respective fields, bears testimony to the entrepreneurial ‘never say die’ attitude of the US.

It seems that the Americans may now be repeating the feat a few decades later as they enthusiastically embrace the complexity of horizontal drilling to gain access to plentiful deposits of shale gas and oil.

Unconventional resources only became viable a little over a decade ago. Only as recently as 2008 was the first 52bcm/y (billion cubic metres a year) of production seen. But by 2012, production of shale gas had increased from to 206bcm/y or 27 per cent of total US gas supply.

Industry and public benefits

The implications are immense. Already the increase in supply has reduced US natural gas prices to incredibly cheap levels of $3/mcf (thousand cubic feet) versus $11 in Europe and $15 in Japan. The cheap energy provides major competitive advantages to the US economy and some notable winners including energy infrastructure businesses and high-energy users (such as the steel, chemical and fertiliser industries). And the public benefits from lower energy bills and higher disposable incomes. The CEO of Chesapeake Energy, a pioneer of shale exploration, believes the average US household could save $2,500 annually from these cheaper energy costs.

Politicians, the weak link of the US capitalist system, will most likely hinder the development of this industry. However, the shale revolution has a momentum of its own, which will ensure a continued and growing presence. The competitive advantages offered to US industry and the general public should give the US some breathing space to resolve other issues – a luxury Europe does not have.

While the short-term prospects for the US equity markets are less clear-cut, the opportunities for continued US economic growth over the longer term look assured. It seems that, once again, the US may confound its sceptics and maintain its economic dominance over the rest of the world for a while yet.

Rupert Elwes is a director at J O Hambro Investment Management