Energy Issues – April 1, 2012

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It is no secret that with gasoline prices at or near $4 per gallon, the minds of American consumers, politicians and analysts are once again focused on ways to cope with the ever increasing demand for oil. This is not only an American but is now a worldwide phenomenon. The crux of the issue is how best to navigate this demand at affordable prices. The immediacy of the issue is further intensified by the prognosis in some quarters, that gasoline prices could reach $5 per gallon fairly soon which could conceivably propel the US toward another recession, just when economic recovery seemed to be building up some steam. In this scenario, there are perhaps not many who give credence to Newt Gingrich’s vow to bring gasoline prices down to $2.50 per gallon if he wins the Republican nomination and later the presidency. (This is a near impossibility given the current delegate count statistics). The bald fact is that the world demand for oil propelled by the burgeoning economies of India, China and other emerging economies outstrips the supply. President Obama must be a worried man. Although rising prices of gasoline are hardly his fault and more the consequence of the demand- supply equation, the American consumer could still punish him by voting for Republican frontrunner Romney. This nagging possibility may have been the motive behind his recent much publicized swing through four Midwestern states where apart from publicizing increased domestic oil supplies through drilling, he touted his administration’s support for the development of renewable energy sources such as solar and wind power etc. T Boone Pickens is a legendry oil and gas billionaire who is a fervent supporter of natural gas a cleaner, cheaper and domestically available natural resource. Following the recent discovery of huge reservoirs of shale gas basins across the United States, Pickens estimates that the US sits atop an estimated 4,000 trillion cubic feet of gas which converts to three times Saudi Arabia’s reserves of oil estimated by the Saudis at 250 billion barrels. Some analysts have started calling the US the “Saudi Arabia of natural gas.” Yet, according to Pickens the US imports $1 billion a day of oil. It is worth noting that the US consumes 20 million barrels or nearly 25% of the world’s total daily consumption of oil while the US population is a mere 4% of the world population. Of the 20 million the US produces 8 million domestically, importing 12 million of which 5 million is from the OPEC countries. Pickens says that it is high time the US stops transferring enormous wealth to OPEC and other oil producers which he estimates at $7 trillion from 1976 to date. According to him, this is the largest transfer of wealth from one country to other regions in history. Such dependence on imported oil means that the US also has to spend vast amounts on policing the world. Five of its eleven aircraft carriers are positioned in the Middle East region to ensure an uninterrupted supply of oil without which the US economy would face severe disruptions. Another interesting statistic quoted by Pickens is that 70% of the daily oil consumption in the US is devoted to transportation. If this sector converts to natural gas (as some buses have done in California) the US oil bill will be reduced appreciably. Pickens and others are lobbying Congress to give tax breaks to natural gas producers which would encourage the transportation industry to convert to gas. Also it has been reported that Pickens and Soros both hold substantial stocks in natural gas companies. According to an investment analyst writing online, the 5 natural gas plays in Pickens’ portfolio are: Chesapeake Energy, Devon Energy, Sandridge Energy, Canadian Natural Resources and Gastar Exploration. I think it might be useful for the Caret Group to explore investment in these companies, as the momentum for the US to divert from oil imports to domestic natural gas is likely to accelerate in the short and medium term future.

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