When we wrote about the US oil renaissance last year, we were already looking at the secondary impact of this huge shift in energy markets.
While investors focused on the implications for the oil price and the exploration and production (E&P) industry, the potential was much wider. Significantly lower energy costs have helped competitiveness, and driven a broader renaissance in US industry and investment in infrastructure to deliver these benefits across the economy.
While the economic impact of shale oil and shale gas on the US has been helpful, it hasn’t been decisive. The oil and gas industry accounts for just 2% of the US economy, and the huge growth rate in this sector has probably contributed less than one percentage point to US growth over the past five years.
Nevertheless, this is still significant in a period of very low growth that has seen many developed economies struggle to generate any growth at all.
Thinly spread
Last year we saw the best opportunities from the US oil renaissance in oilfield services, infrastructure and industries that gained a competitive boost from cheap and plentiful natural gas for fuel and feedstock.
That was a good call in 2012, especially in railways, where we followed Warren Buffett’s lead. But this year, falling commodity prices have reversed gains for the US basic materials sector.
We still see benefits accruing from the US oil renaissance, but they are spreading increasingly thinly across the economy and have been discounted by investors.
More to be done
The exploration of shale reserves elsewhere in the world is still in its early stages. These initiatives are welcome, but have so far failed to make the same impact they did in the US.
Techniques that are proven in the US can’t simply be exported to shale reservoirs in Europe, for example. Even using US expertise, the differing nature of reservoir rocks means that different – often bespoke – techniques need to be developed to economically exploit those reserves.
The current version of fracking technology (to hydraulically fracture small holes in reservoirs to increase the flow rate of hydrocarbons) was first applied in the US in 1997, but it took another decade and enhancements to horizontal drilling techniques to substantially increase shale production.
So it could take another decade to realise the economic benefits of shale reserves elsewhere in the world.
