Thursday, June 13, 2013

Gas Revolution

Be bullish about the economy

BY BERNIE McGINN

ouve probably already heard about Americas shale gas revolution. Skeptical? You shouldnt be. This isnt mindless hype. The rapid expansion of the domestic gas sector is driving the reindustrialization of huge parts of the American economy and setting this country up for sustained growth in the future. To truly appreciate the economic potential of Americas natural gas reserves, you need to cast aside old perceptions of the energy industry. This is a whole new ball game. In 2008, oil reached $145 a barrel, gasoline more than $4 a gallon, and natural gas more than $10 per million British thermal units a technical, industry-standard measure known as BTUs. At the time, many experts were predicting energy prices were set to rapidly rise. They assumed supply would contract while demand continued to increase. Half of that equation turned out to be wrong. Energy demand has certainly expanded, but so has supply dramatically. The old saying that high prices kill high prices held true. Americas energy companies heavily invested in new energy production and extraction

new energy production and extraction technologies, fueling a natural gas renaissance. The president himself has declared that America is now the Saudi Arabia of natural gas. In just the past five years, America has overtaken Russia as the worlds largest gas producer. Thats no small feat, especially considering that in 2005, the United States was coming off a decade of declining gas production. Technological innovation has empowered energy firms to develop previously unreachable gas deposits. Supply has gone up and price has gone down. Today, natural gas prices in Europe and Asia are three to four times higher than here in the States. Cheap gas has reinvigorated industries that were previously thought to be in permanent decline. Take the steel industry: Natural gas exploration and development require a significant amount of steel for tubes, pipes and joints. This demand has driven significant growth in steel manufacturer sectors throughout the country. Whats more, steel plants run on gas a drop in per-BTU price lowers plant operation costs and expands revenue margins. In large part because of the economic benefits of expanded natural gas production, American steel companies have invested more than $1.5 billion in recent years to increase production capacity and reopen plants that were once deemed uneconomical. And the steel industry is just the start. Other energy-intensive industries such as manufacturing, agriculture and petrochemical production also have benefited enormously from expansions in American natural gas production. As Ivan Glasenberg, CEO of the commodities firm Glencore, has so powerfully put it: The effect of cheap shale h h

fully put it: The effect of cheap shale gas has given America once again the opportunity to become a big industrial nation again. It has cheap power, and cheap power allows it to produce goods cheaply. From an environmental perspective, natural gas is also a clear win. Burning gas releases 50 percent less carbon emissions than coal, and 30 percent less than oil. New research from the U.S. Energy Information Administration finds that in 2012 energy-related carbon emissions fell to 1995 levels. Thats all the more remarkable given that between 1995 and 2012, Americas economy grew 50 percent and our population added 50 million people. This drop in emissions has in part been driven by the environmental advantages of natural gas. Of course, there is still more work to be done to further reduce carbon emissions and avoid catastrophic global temperature changes. But natural gas has emerged as the ideal bridge fuel to move American industry from oil to renewable energy. The natural gas renaissance keeps us as investors bullish on the U.S. economy. Continued expansion in domestic production will fuel sustained economic growth in a broad swath of industries. The American gas renaissance is a shining example of this countrys incredible resilience and ingenuity precisely the traits that will keep us leading the world economy for decades to come.
Bernie McGinn, CFA, is the president and chief investment officer of McGinn Investment Management, based in Alexandria. He also is portfolio manager of the Union Street Partners Value Fund. Contact him at Bmcginn@mcginninvests.com.