America with its shale oil revolution is expected to surpass Saudi Arabia in oil production by the end of this decade. America is the world’s largest consumer of oil and is a net importer of the commodity.
Once the US produces enough oil to export, the world’s dynamics will change. India will have positive and negative effects when US turns net exporter of oil.
India energy policy will have to factor in a situation where oil is available in plenty while investors will have to factor in a situation where the US turns dominant once again in economic terms.
The shale oil revolution is giving rise to the term “Saudi America”, signifying that the US could become the largest producer of oil in the world.
Commentators are now talking about oil prices coming off in the world with some of them even questioning the viability of shale oil exploration with production costs in a range at $44 per barrel to $68 per barrel.
The first implication of “Saudi America” is obviously the value of the dollar. The dollar will see a sustained rise in value as the US lowers its trade deficit on the back of oil exports rather than oil imports.
The US averaged a trade deficit of around $32 billion a month over the last twenty years, according to tradingeconomics.com. A lower trade deficit or even a trade surplus in the US has a huge positive effect on the dollar.
A sustained strong dollar will pull down value of many commodities, including gold. Gold prices that have doubled since 2008 on the back of worries of value of the dollar due to printing of money by the US Federal Reserve (QE1, QE2, and now QE3) will collapse as the dollar strengthens and inflation expectations fall sharply on stable to lower oil prices.
Industrial commodities may not see sharp fall in value due to lower oil prices helping many economies grow their infrastructure but the fact that many regions of the world that are dependent on oil prices, including Russian and the Middle East, will witness a decline in growth, which will help maintain a demand-supply balance.
India being a net oil importer will benefit from stable to lower oil prices. India’s oil subsidy bill will come down leading to a lower fiscal deficit. However India’s efforts on oil exploration and production will suffer as high production costs can become unviable if oil prices come off.
A rising dollar will keep the rupee weak leading to oil import costs staying sticky. India will become more dependent on imported oil on the Saudi America effect.
This will prompt investors to change the way they look at markets. Investors over the last 10 years have been betting on a weak dollar on the back of the US trade and fiscal deficits and on the back of loose monetary policy of the Fed.
The dollar index, which measures the greenback against a basket of currencies, had fallen to an all-time low of 71.6 in 2008 before climbing back to current levels of 80. Investors the world over will now start moving money back to the US and that will make the US markets the best performing asset class in this decade.
Saudi America could mean a new world order in financial markets. Many old theories could become extinct while new ones emerge. Investing could become a new ball game altogether. Investors should start preparing themselves for the changing face of markets.
The US may not produce enough oil to surpass Saudi in oil production but the fact that the more oil the US produces reduces their dependence on imported oil shifts the balance of power from one part of the world to the other. It is better to be prepared for this shift than ignore it completely.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors.