Back in the swinging sixties, Liza Minelli famously sang, ‘money makes the world go round’.
She had it all wrong. It’s not money – it’s cheap energy that makes the world go round.
Cheap energy means cheap transport, cheap manufacturing, and cheap food – all of which translate to higher living standards.
In fact, this makes cheap energy important enough for a nation to fight for.
So when oil started to get harder to find in the US in the middle of the twentieth century, they started a sixty-year long campaign to dominate the Middle East and secure its energy.
This has caused most of the major conflicts in the region in the last half century. But maybe, finally, the worst is behind us…
The Shale Gas Revolution in America
You may have heard of the US shale gas revolution.
Shale gas production employs a drilling technique that gives drillers access to previously inaccessible energy sources.
In under ten years, shale gas has gone from nowhere… to comprising a third of the US natural gas market.
In fact it has been so successful that the price of US natural gas has fallen out of bed and into the basement, from $15 to less than $4.
75% Fall in the Natural Gas Price in Seven Years
The monumental effects of this will take years to filter through.
For one thing, it’s creating a tidal wave of employment in the US industry at a time when jobs are hard to come by. A cheap source of energy could also make US manufacturing more competitive once again.
And the impacts of this cheap energy will spread globally as well.
For one thing, the US will gradually stop beating up the Middle East for their energy, as it becomes less dependent on this source. (Although the US-Israeli relationship means peace in the Middle East is still a distant dream.)
Another important effect will be a drop in price for other energy sources, like coal and uranium, as natural gas displaces them.
To start with, many hydrocarbon fuelled power stations in the US have already switched from coal to natural gas over the last two years.
Now that natural gas costs are down 75%, and likely to stay down, it made sense to switch the power stations over to gas. Natural gas is an environmentally friendlier fossil fuel too, so it means less pollution compared to coal.
You can see the effect on the US power mix in this chart. In under two years, use of natural gas as an energy source has almost doubled from providing 70 million Megawatt/hours – to 130 million Megawatt/hours.
It’s suddenly very close to being the US’s dominant source of electricity:
The United States – Cooking on Gas
This is a phenomenal change in a short period, and is great for the US.
Coal and Uranium Getting Kicked in the Guts by Gas
However the change in the status quo is having all sort of knock on effects elsewhere.
For one thing, the switch to natural gas is creating a coal surplus which is hitting the seaborne markets.
This is part of the reason that the price of coal from Newcastle has fallen from around $120 this time two years ago, to recently plunge under $80 / tonne.
At a time that lower Chinese demand is having an effect as well, the US switch to natural gas isn’t helping the Australian coal industry.
You wonder if Treasurer Wayne Swan included that in his calculations for the mineral resource rent tax, or his budget projections…
And with the US sitting on at least a century of shale gas, this is not a market driver that will pass quickly.
Uranium has been in the dog house since the Japanese earthquake and nuclear power accident at Fukushima.
The uranium spot price had been holding well around $52 / lb for a year or so.
But six months ago it cracked.
And since then, spot uranium has plummeted as low as $40 / lb.
The uranium spot market is only a short term indicator for uranium, as most is traded through long term contracts. But all the same, it’s a good bellwether for what’s going on.
And right now, it’s looking pretty bleak. Part of this is due to the Japanese government turning increasingly against nuclear power.
But I think cheap natural gas as a competitive source of power in the US (a major uranium user) is also part of the picture.
The chart above shows a very slight pullback in nuclear power production this year.
If this is the start of the same trend we saw for coal, then it’s another kick in the guts for uranium.
This is all bad for the status quo, but great for the industries leveraged to the new guard. So it’s essential for investors to stay up with the story.
Dr Alex Cowie
Editor, Diggers & Drillers
PS. Leverage is a great way to boost your returns. You can either use margin lending to trade big blue-chip shares, or you can use the method I prefer – buying and selling small-cap stocks for big gains. It’s also a method favoured by your regular editor, Kris Sayce. Keep an eye on your inbox later this week for a notice from Kris about the greatest Australian you’ve never heard of, and how he used risk and leverage to create enormous wealth…
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