When thinking about the world’s interlocking food, energy, debt and security challenges, it is vital to recognize the importance of China. It is also important to take note of the current strengths and weaknesses in the world’s largest economic blocs: doing so reveals the shape of the pieces in a jigsaw puzzle and how they may fit together harmoniously.
- Europe is (1) long Mediterranean debt that might find stronger bids at lower prices, and (2) short capital and a coordinated fiscal policy.
- The United States is (1) long dollars, natural gas, and food, and (2) short of tens of millions of jobs.
- China is (1) long US Treasuries ($1.2Tn, or 38% of its F/X reserves), and (2) structurally short of many primary commodities.
Natural gas is one of the markets that can bring these pieces together for mutual benefit. As a result, historic events are unfolding in natural gas markets that will likely alter the composition of global GDP over many decades.
The US and Canada— (as the world’s first and third largest producers) —have moved significantly in 2011 toward building gas export supply chains (and gas-related plastics, fertilizer, and chemical chains) that will deliver gas into Asia at prices based on North American gas, not world oil. This is a titanic change from prior pricing schemes and represents an important evolution for world trade and future inflation expectations among consumers, given the nearly US$100 per boe price differential between Asian oils and North American gas basis.
Until now, a lack of political willpower and physical infrastructure prevented this price gap from being arbitraged, to the economic disadvantage of all parties. This is now changing rapidly, aided by the fact that North American policymakers with green credentials also see an environmentally-sound pathway for capturing this economic return.
The United States is now the world’s largest natural gas producer, having surpassed Russia in 2009. The US is also the world’s third largest crude oil producer. Casual observers would likely be surprised to learn that the US could become the largest oil producer in the world in just a few years, if it so chose to make the necessary investment in undeveloped resources in order to surpass Saudi Arabia and Russia (Exhibits 2 and 3). Including NGLs and condensates, US petroleum output is 1.42mbd behind Saudi Arabia and 1.69mbd behind Russia.
To be continued …..