Porter Stansberry doesn’t mince words. Politicians? Scumbags. People in general? Lazy. Laws against oil exports? Disastrous. In this interview with The Energy Report, the Stansberry & Associates Investment Research founder argues that oil exports could usher in an era of unprecedented prosperity, if legislation would only allow it. However, he says there’s no holding back U.S. energy wealth; the profits will sprout up in oil- and gas-related industries like fertilizer, petrochemicals and shipping. Find out where Stansberry is putting his money. This time, it’s not on E&Ps.
The Energy Report: As a history enthusiast, Porter, to what extent do you believe technology has changed investing?
Porter Stansberry: The future will be unlike the past in every way related to technology, but it will be exactly like the past as it relates to people. Technology changes a great deal, but people don’t. You can count on politicians to be scumbags and most people to be lazy. But as for investing, technology gives far more people access to information. Only one person in the world knew the actual price of a high-yield bond 25 years ago—Michael Milken—and he made a fortune with that information advantage. Today, everybody has access to trading information. Everyone has access to price. In general, technology has made finance a smaller-margin business. It’s led to enormous scale in our financial institutions, which is the only way they can really survive. But fear and greed are still the underlying forces that drive the markets, and investors are just as subject to irrational emotional decisions as they’ve ever been. I don’t expect technology will ever change that.
TER: Getting specifically into energy, a few weeks ago the International Energy Agency World Energy Outlook (WEO) said the U.S. would become the world’s largest oil producer, overtaking Russia and Saudi Arabia, before 2020. Then Goldman Sachs said it would happen by 2017.
PS: They stole my thunder. I’ve been saying 2017 for maybe a year now. If Goldman is saying 2017 and IEA is saying 2020 it will probably happen in 2016.
TER: How will the geopolitical and socioeconomic landscape change when the U.S. becomes the largest oil producer?
PS: One of the biggest drags on the U.S. dollar over the last several decades has been the trade deficit resulting from petroleum imports. That’s going to largely disappear, though not completely because we’ll still need some petroleum imports for certain flavors of crude. As for exports, considerable legal hurdles remain. We have archaic laws about oil because we had long believed that oil was a strategic resource and that the world was going to run out of it in the short term. Unless we change our laws to allow exports of crude oil, none of this magnificent new supply is going to aid our economy at all. In fact, we’ll have a terrific glut of oil, and we’re already at record levels of storage. The price hasn’t collapsed yet because unrest in the Middle East is causing fear to inflate the market price, but the price will absolutely collapse if we don’t allow for oil exports. The entrepreneurs who brought us this incredible new supply would, in that scenario, suffer, and many companies would go bankrupt because the oil industry is not capitalized to survive $50/barrel (bbl) oil.
But to answer your question—how the geopolitical and socioeconomic landscape will change when the U.S. becomes the largest oil producer—I’d have to know the unknowable, which is how or if oil policy will adapt. So far, it doesn’t look good. So far, 12 companies have applied for licenses to export LNG, and only one license has been granted. I don’t think the Obama administration is ever going to do anything to help the domestic oil industry. And I think that the result will be a price collapse and an oil glut that will harm our economy.
TER: You mentioned one company has a license. Who is that?
PS: The Department of Energy granted a conditional permit to Cheniere Energy Inc. (LNG:NYSE.MKT). It’s an ironic story. For many years I was a short seller in the stock. In fact, I published an article in 2006 when the stock was trading between $30 and $40 per share. I wrote that this company’s business model was beyond stupid and had ventured into insane territory. Its plan was to import LNG into the United States and the company built a $6 billion ($6B) facility, the Sabine Pass LNG Terminal, to bring in natural gas from Qatar. I said it was insane because not only was the U.S. on the verge of a huge glut of natural gas, but for decades the U.S. had either the largest or second-largest reservoir of gas anywhere in the world. So the U.S. importing natural gas is like Saudi Arabia importing sand. It doesn’t make any sense.
Of course, natural gas prices collapsed and Cheniere almost went bankrupt. It saved itself by selling new equity to a very smart group in New York, Blackstone Group. With the money raised from Blackstone Group, Cheniere switched that facility from imports to exports and applied for an export license long before government officials thought any market for U.S. export gas would materialize. Cheniere got lucky.
TER: To what extent will manufacturing and petrochemical industries move to the U.S. to take advantage of cheap natural gas prices?
PS: There’s roughly $40B worth of construction going on in the chemical industry. You’ll see the same kind of growth in fertilizer. You’re also going to see huge growth, which hasn’t really started yet, in refined products. Imagine it this way: If the government won’t allow exporting energy in the form of crude oil, then you can damn well bet that entrepreneurs will find a way to export that energy in some other form. Fertilizer is energy rich and easy to ship, so we’ll have a huge boom in domestic fertilizer production. How about propane? There’s no law against exporting propane. Targa Resources Corp. (TRGP:NYSE), a company we recommend, is expanding its Mont Belvieu import/export complex to boost propane export capacity.
The funny thing is the energy will find a way out of the country. That’ll be good for our economy, but it’s so inefficient. We’ll have enormous investments in all these industries surrounding the energy complex that are much lower margin. It would make so much more sense to just export the oil.
TER: But wouldn’t bringing in more production manufacturing have the additional advantage of creating jobs?
PS: Yes, but it’s not the highest and best use of our time, our capital or our people. This is something important about economics that people do not understand at all—comparative advantage. The U.S. has enormous comparative advantage in lots of different industries. Manufacturing is not one of them. Neither are giant refineries. Yet that’s what we’ll be stuck with.
TER: What would change the equation?
PS: There’s really no easy answer. It’s mind-boggling. Imagine for a moment where Saudi Arabia would be today if it hadn’t exported its oil. It could have a huge petrochemical business and be the world’s leading producer of fertilizer and plastics. But guess what? The fact that Saudi Arabia put its resources to their highest and best use made it one of the richest countries in the world.
TER: So maybe we should export oil rather than gas.
PS: Absolutely. To make natural gas as our main export energy source would cost trillions to build enough of these terminals and it would take decades. Why not just hook up a pipeline of crude oil to a tanker and be done with it? Natural gas is so clearly better suited for domestic energy needs. We should export the crude and use the gas domestically, but that’s not what will happen. We’ll end up with higher prices on domestic crude with very little export and that’ll be disastrous.
TER: You’ve described shale oil and natural gas in North America as one of the biggest investment opportunities. How do you reconcile that outlook with depressed prices?
PS: You can be very bullish on production without being bullish on price. In fact, I think that’s the only logical position. When natural gas was at $4–5 per thousand cubic feet (Mcf), I said it would go below $3/Mcf and people thought I was out of my mind. It’s not only gone below $3/Mcf, it’s essentially stayed there since 2008 or 2009. As you drill more horizontal wells, as production in the Eagle Ford and the Bakken and other places soars—just look at oil storage. We’ve never seen this much oil in storage in the U.S. There’s no doubt the price will crack eventually, and when it does it will crack hard.
I’ve been telling my subscribers not to buy the exploration and production (E&P) companies but to buy the companies that are able to use lower energy prices to their advantage in their own markets, such as fertilizer companies and terminal and shipping stocks, such as Targa. You can find opportunities coming about in lots of little nooks and crannies because of the excess energy supply.
TER: What are some other examples of energy-related opportunities?
PS: The big way is to play lower energy cost in the U.S., or just to find any business that uses energy and can get a retail price for the product. Think about Calpine Corp. (CPN:NYSE), an unregulated producer that converts natural gas into electricity. The price of electricity in wholesale markets is dominated by coal-generated electricity, so Calpine stock price is essentially a way to arbitrage the price of natural gas and the price of coal. If gas remains cheaper than coal, Calpine’s earnings will go up—and that’s what I believe.
Another good example is fertilizer. About 75% of the cost of fertilizer is made up of natural gas but the price of fertilizer is based on supply and demand. Global demand for food, of course, continues to grow quite rapidly, and due to the inflation of the dollar, farm prices continue to rise, so there’s plenty of capital for buying fertilizer. This is another simple way to play and there are lots of good fertilizer stocks out there. The one we’ve recommended is called CF Industries Holdings Inc. (CF:NYSE).
And, then, of course, look for companies that are constructing the pipelines, making the steel for them, handling the storage, building the terminals. We’ve recommended lots of those companies.
TER: When you mentioned businesses that take advantage of lower energy costs, you mentioned those building terminals. Why would we want more terminals if the law won’t allow exporting oil?
PS: Terminals aren’t necessarily just for export, but also storage and distribution. We need huge new storage facilities, huge new pipelines and huge new terminals all across the country mostly to move gas but also NGLs and crude oil. Right now we’re using railroad cars to move crude out of the Bakken in North Dakota, which is very inefficient.
TER: Whereas producers need higher prices to sustain the production costs.
PS: Mostly, yes. Operating costs are actually very low once the wells are in place. To drill a well in the Eagle Ford, for example, costs about $7M, but you can make that back from production in 90 days. The problem these companies face is the cost of buying additional acreage. As soon as people know oil’s around, real estate prices go bananas and companies have to borrow tons of capital to buy the leases and drill before the leases expire. This puts tremendous capital pressure on their balance sheets.
The number-one thing to be careful of right now in this space is the oil companies that have been rewarded for building huge real estate portfolios but have done so with tons of borrowed money. That puts these companies in a precarious financial position if the price of oil falls. It’s not because they can’t produce oil for $35/bbl. They can. However, they wouldn’t be able to pay off the debt on their balance sheets.
TER: Considering the glut of natural gas, do you foresee changes in the way U.S. consumers use energy?
PS: We’ve already seen a huge shift in what I’ll call the robust transportation sector, the big trucks and the buses, moving into natural gas. That’s absolutely going to continue and it’s going to grow. However, to build these things in a way that’s safe requires a big, heavy vehicle, so I don’t think you’ll see that at the retail level.
Porter Stansberry is intense when it comes to investing and recreation. His Atlas 400 Club brings together intelligent, successful people from all over the world for adventures that last a lifetime. See a video from his travels, including a recent trip that included racing Porsches in Germany.
Most people in the U.S. don’t understand the role that energy plays in our economy. They don’t understand that the boom from 1900 to 1925 was fueled mostly by the oil found at Spindletop in Texas. They don’t understand that all the success we had in World War II and the boom that led to the1950s and 1960s came from east Texas. Literally the energy that drove all of that productive capacity came out of the ground with the east Texas discovery of 1930. The size of the discoveries found recently dwarf that. East Texas ended up being a 4B bbl field of oil. Every one of these new major shale plays contains 20B bbl of recoverable oil—all five times bigger than east Texas and more than 20 of them are currently being drilled. We’re sitting on the biggest economic and financial boom in the history of our country and we’re strangling it.
TER: If indeed we’re sitting on all this gas, why doesn’t the price of gasoline at the pumps go down? And if natural gas can create electricity, why aren’t we seeing more electric cars?
PS: Because electric cars don’t work. How many dead Fiskers do you need to see before you realize they’re not reliable? The hybrids are fine because they’re still using gasoline to drive them. If it makes it good for you to turn gasoline into electricity before it spins your wheels, it’s fine with me. But it’s completely unnecessary. In regard to electric power, we don’t have the battery technology yet to make this work. It’s not even close. That would be great but it’s naive to think we can plug all of our cars into the power grid. Can you imagine if everyone could overnight just plug all their cars into the power grid?
By the way, all those power plants would be coal or natural gas, so you’d still be consuming hydrocarbons. So electric cars are just fantasy devices. They don’t make sense technologically, economically or ecologically.
And as for prices at the pump, a very important thing that people don’t get at all is that gasoline isn’t oil. It’s a derivative of oil. The lower price of oil will increase the crack spread, which will make refiners more profitable. But gasoline comes from refineries, and no new refineries have been built in the United States since 1974. If you want cheaper gasoline, guess what you have to build.
TER: Refineries—but earlier you said that’s not a good use of capital.
PS: It is not a good use of capital for export but it’s incredibly important for the domestic market. And guess who sponsors the green politicians who don’t want any refineries built? The refining companies. They don’t want any more competition. People think the Keystone XL Pipeline didn’t get built from Canada to the U.S. because the Obama administration’s full of these ecologist folks. No. The pipeline didn’t get built because the E&P companies in America don’t want to compete with Canadian crude.
TER: Any other insights you’d like to give to readers of The Energy Report?
PS: Yes. If they want to know what’s ahead for the oil markets, study the natural gas markets from 2008 through 2010, because the same technologies are being used in the same fields and the result will be exactly the same. There’s going to be a glut of domestic oil, and the oil companies that have leveraged their balance sheets to buy lots of acreage will have a very hard time.
TER: Assuming of course that we don’t change some laws to allow exports.
PS: In that case, everything would change overnight. First of all, the global price of oil would equalize between West Texas Intermediate and Brent, at somewhere around $100/bbl. The profits these U.S. companies would make would be fantastic for our economy and it would be great for the shareholders. Unfortunately, the odds say that American politicians won’t make any kind of wise economic choice. That only happens by accident.
TER: Let’s keep our fingers crossed for a serendipitous accident, then. Thanks, Porter.
Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry’s Investment Advisory, deals with safe-value investments poised to give subscribers years of exceptional returns. Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world independent research. They’ve visited more than 200 companies in order to find the best low-risk investments. Prior to launching Stansberry & Associates Research, Stansberry was the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter. Read more Stansberry oil insights and Porter’s Atlas 400 Club.
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Is this not one of the biggest threats to Pittsburgh’s economy in years?
Why a local economic story? A lot of this stuff is not leaving here by plane:
If you dig into that export data lots of things pop out. The value of international exports in “Mining (except oil and gas)” went up over 60% between 2010 and 2011. That is data for the MSA, which means it does not even capture the prodigious coal being mined in nearby counties like Greene. Might be worth noting that more recent national data shows more coal exports for 2012 thus far at least when measured in tons, if not value.
Something that might be of minor interest across all of greater Frackylvania.
A new report just out from Rice University debunking some assumptions about the future of natural gas in the US. Read: U.S. LNG Exports: Truth and Consequence
So if we do not start exporting it… where will it all go? Still waiting for someone to point out to me a regular old consumer with an arms-length purchase and use of a natural gas automobile in the city of Pittsburgh.
I don’t quite have it in me to wade into the ever and yet again ascendant assessment issues in Allegheny County…. leaving me a bit factoid deficient for the day.
So apologies a bit for the echo chamber-ness of this, but Jim R. has some interesting catches for the day. One is a whole story: From Rust Belt to Exporting Giant.
Nice pic… amazing how the fountain is always functioning so well. I swear these photos will be 2-3 skyscrapers behind the times before the media starts using current versions. We might need some Photoshop assistance in the end.
But the article there does have one very interesting factoid. If you check out the latest stats on international trade for the Pittsburgh region (link there on the right has the data fyi) a factoid pops out. Between 2009 and 2010 international exports from the Pittsburgh region jumped from $8.3 to $12.2 billion. As a percentage it is one of the biggest metro area jumps. Part of that follows from a pretty depressed 2009, but still looks like a new peak value for international exports for Pittsburgh in 2010.
Before anyone gets jumping to conclusions… what is the biggest export from Pittsburgh… and what saw the biggest jump in export value between 09 and 10? Coal. Hard black stuff. Pittsburgh’s disruptive technology of 1783. Remember when I said that one of the overlooked issues impacting the region are the coal-jams on the high seas.
, in response to Obama’s claim that international trade isn’t always fair:
Here we see the view, commonly held by the media and non-economists in our universities, that international trade is a competition, analogous to sports or military competition (sometimes, “trade competition” is compared to the Cold War). If the playing field is not level, then the trade is not fair. Economists, and this view is not limited to Austrians, understand that international trade is the fruit of cooperation, not competition. America and China are not trade competitors. Paul Krugman thoroughly demolishes this fallacy in “The Illusion of Conflict in International Trade” (reprinted in Krugman’s Pop Internationalism). Krugman explains that in international trade “it is the illusion of economic conflict, which bears virtually no resemblance to the reality, that poses the real threat.”
There are two main fallacies in this paragraph. The first is that of a false dichotomy. The second is the blatant ignorance of domestic economic policy as it relates to trade policy.
Regarding the former, it is wholly fallacious to say that trade is either analogous to competition or to cooperation. The truth is that there are elements of both. An automobile manufacturer, for example, must cooperate with its suppliers, distributors, and customers. It must also compete against other automotive manufacturers, as well as any company that manufactures substitute goods. Both comparisons can be correct, depending on how they’re applied, and it is thus fallacious to claim that trade is comparable to one or the other when it can be comparable to both.
Regarding the latter, it is quite fallacious to ignore reality when discussing policy. The fact of the matter is the US economy is quite hindered by regulations in ways that many foreign countries are not. It is not at all fair or free to allow foreign companies to compete with domestic companies when domestic companies have been hamstrung by the federal government. I’ve written extensively on this before, so I will not repeat myself here.<
In all, the case for free trade is often predicated on focusing on theory at the expense of reality, and building arguments on obvious fallacies. If this is the best free-traders have to offer, in the way of argumentation, perhaps they should reconsider their position.
The United States trade deficit surged in January to the widest imbalance in more than three years after imports grew faster than exports.
This is not a good sign. The US economy is predicated on false demand, by which I mean that the US, and the citizens thereof, buy a lot of things on credit. One thing that’s true about buying things on credit is that, in general, the credit has to be paid back, usually with interest. As Ian Fletcher noted in Free Trade Doesn’t Work (review forthcoming), the US has bought a lot of foreign goods on foreign credit, and this will have to be repaid, either with goods or with capital. Thus, there are a lot of downright terrifying scenarios implied by the simple fact that the US has run a trade deficit for every year of the recession, and continues to increase its trade deficit even now.
In the first place, it could be that the US is maintaining its trade deficit by essentially offshoring control of its capital. In this case, it would mean that foreign businesses and governments own US land, or US factors of production (factories, e.g., or perhaps natural resources). This means that US policy will quite probably become more pro-foreigners, which does not bode well for maintaining the social fabric that made this country free and wealthy.
In the second place, it could be the case that the US is simply expanding its credit with nary a thought of how it will be repaid. It will either be defaulted on, which has its own obvious negative implications, or it will be inflated out of, which also has its own obvious negative implications.
In the third place, it may simply be that the US is the least-worst place to trade right now, and so foreign producers sell on credit simply because they need to clear their inventories, and all the other potential markets are even less creditworthy than the US. Incidentally, this would imply that the situation in Europe is worse than most suppose, and would also imply that South American and African countries are all a long way from developing into powerful market economies, which does not bode well for lovers of liberty.
No matter how it’s sliced, though, the fact that the US has not run a trade surplus at any point during the recession indicates that a) demand hasn’t reset to its true levels and that b) things are eventually going to get much, much worse.
In recent months, we’ve had a few slip-ups by the official statistical system in India:
- Yesterday’s IIP release was preceded by a mistake. Mint says: On Monday, the government was guilty of a similar error in its factory output data. Till it corrected the number pertaining to capital goods output, analysts were left scrambling for explanations as to how this had grown 25.5% while overall factory growth had shrunk 5.1%. (The answer: it hadn’t, and had actually shrunk by 25.5%).
- On 9 December, we discovered there were important mistakes in the exports data.
- In December 2010, RBI modified the numbers that it releases about its trading on the currency market.
- In September 2010, there was a mistake in the quarterly GDP data released by CSO.
These examples are part of a larger theme, of problems of the official statistical system. The Indian statistical system is afflicted by three levels of problems:
- The first level is conceptual problems and analytical errors. As an example, the weights of the WPI basket are wrong; the estimation methods used in the IIP are likely to be wrong, etc. Quarterly GDP measurement does not have a demand side (which requires a quarterly household survey, which the government does not know how to do).
- The second level is the lack of rugged IT systems. The production of statistics requires high quality enterprise IT systems. The government does not have the ability or incentive to roll these out. As an example, the September 2010 mistake in quarterly GDP data seems to have come about because quarterly GDP data is produced in a spreadsheet. As with all usage of spreadsheets, this is highly error prone.
- The third level is the problems of truant front-line staff. In a country which is not able to get civil servants to show up at school to teach, it is not surprising that front-line staff of statistical agencies are untrustworthy in going out into the field and filling out survey forms.
The mistakes that we’re seeing are merely a reflection of #2 (the lack of rugged enterprise IT systems). But there is much more going on which holds back the usefulness of official statistics.
Government officials in this field have pinned a lot of hope on the implementation of the report of the statistical commission (headed by C. Rangarajan, 2001
). I am personally not optimistic about this. The report seems to emphasise an incremental agenda of building the statistical system, emphasising the interests of the incumbents. What is required is a ground-up rethink about the statistical system, from first principles, so as to address the three difficulties above.
Turning to the users of official statistics, most economists attach enormous prestige to phrases like GDP, IIP, CPI, etc. But in India, we cannot unthinkingly use some numbers just because they come with the label `GDP’ from some government agency. We have to always skeptically ask first principles questions about how the data is generated. All too often, the standard Indian government data is useless.
In the class of government data that I know of, I feel the CPI is reasonably okay
. The WPI is a fairly useful database about prices but useless as a price index. The quarterly GDP data, IIP, NSSO, ASI are untrustworthy.
Decision makers in government and in the private sector need to struggle with these issues, carefully thinking about what statistics are allowed to influence their decision processes. Academic users of data need to be much more careful about avoiding garbage-in-garbage-out problems.
With America “the Saudi Arabia of natural gas,” as Stansberry & Associates Investment Research Founder Porter Stansberry puts it, U.S. energy independence is no longer a pipe dream. It’s evolved from political posturing to promise based on practical factors that he shares in this Energy Report exclusive. Porter’s “incredibly bullish” outlook stems in part from technological efficiencies that will help bring enormous amounts of new U.S. production online. Exploiting these technologies, he states, presents the “greatest opportunity the energy complex has over the next several decades.”
The Energy Report: You have said you don’t believe in peak oil, Porter, because as oil prices rise, the entrepreneurial spirit will lead people to find ways to extract oil either in new places or with new technology. With prices running between $80 and $100/barrel (bbl), is the era of cheap oil over? And if so, what will be the impact on economic growth?
Porter Stansberry: I feel the same way about peak oil as I do about deflation. It shows massive ignorance of economics and human nature. In regard to oil prices, you have to separate the price from the currency, because in Swiss francs and gold, oil prices haven’t changed much in 50 years. Yes, the price of crude oil is volatile; it goes up and down. But in 1950, it took 2.5 grams of gold to buy a barrel of oil. Today, 2 grams of gold will buy you a barrel of oil. Thus, if you take the loss of the dollar’s purchasing power out of the equation, you’ll find that the price of oil has remained very flat.
So I would argue that despite massive increases in consumption, the real price of oil has remained unchanged. Going forward, that will almost certainly remain the case. Why? Because geology doesn’t create oil; capital creates oil. The more capital you put toward oil, the more of it there will be.
TER: But the cost to extract the oil is increasing. We don’t have “easy oil” anymore.
PS: No, that’s not true. Just as with any other economic activity, the more experience we have in oil extraction, the more efficient we become at it. In fact, the real price of oil would go up considerably if the true costs of extraction were going up as well, and as I explained, the real price of oil has been flat.
Let’s be very clear—you can’t measure these things in dollars because the dollar has lost 90% of its purchasing power since 1971. It’s lost 50% of its purchasing power since 1990. Measuring the oil industry in dollars gives you a very warped view. Pick a sound currency such as Swiss francs or gold grams and look at the oil business through that lens.
I believe that what’s happened with the U.S. dollar over the last three years has resulted in an enormous mis-pricing of oil. Speculators are rushing into oil and fleeing the dollar, which is producing an unsustainable demand for oil. Because this demand is investment-based and not economy-based, it is stimulating production that exceeds real demand by a wide margin.
TER: And where will that take us?
PS: Over the next 18 months, I expect a major correction in the price of oil and gas, with oil falling back to $40/bbl. It won’t stay there long, but it will be a big correction.
TER: What’s the extent of the stimulated production you mentioned?
PS: What’s happening onshore in the U.S. with oil and gas production is amazing. We’re setting new records for hydrocarbon production in the U.S. this year. Obviously, you can’t have record levels of hydrocarbon production if you’re supposedly running out of oil, so serious proponents of peak oil have their heads in the sand.
One more thing about peak oil. . . Look at a great book, The Prize: The Epic Quest for Oil, Money, and Power, by Daniel Yergin, cofounder and chairman of Cambridge Energy Research Associates. It’s a whole history of the oil industry. For example, war-related demand made oil prices soar during World War II, and lots of production ensued. Then big debates erupted over whether domestic use of oil should be tightly regulated because oil was a scarce, strategic commodity needed more for tanks and battleships than cars. Those favoring the tight controls argued that we were going to run out of oil, that all the major supplies of oil in the U.S—and likely in the world—had already been discovered. That was in 1946, before Saudi Arabia had really ramped up production.
You see this in the oil industry time and time again. Fears that we’ve found the last oil, that we’re going to run out, pop up constantly. And soon afterward, because the price goes up, huge new reservoirs are discovered. Always. They’re discovered because the capital is there for the exploration.
TER: You noted earlier that experience in oil extraction leads to further efficiencies, and U.S. Department of Energy estimates suggest that horizontal drilling alone can lead to increasing reserves from existing oilfields by 2%.
PS: Horizontal drilling is a fantastic technology that’s leading to a renaissance in the oil and gas industry in the U.S., and you’re going to have enormous amounts of new production come online in the decade ahead. That will, of course, force the prices back down. And inevitably, in 25 to 30 years when the prices go back up, we’ll again hear, “Oh no, we’re running out of oil.” It’s a constant cycle. It’s human nature. It’s economics. Really, if people just read a little bit more history, they wouldn’t fall for such antics.
TER: If we’re now at a point in this constant cycle where capital infusion will find additional oil supplies, will oil equities drop correspondingly?
PS: Obviously. As oil and gas prices fall over the next 18 months, it will reduce oil and gas company earnings and their stock prices will fall. They may not drop as much as they ordinarily would, however, because many of these companies are in the midst of enormous expansions of their proven reserves. Oftentimes, as you know, oil and gas companies are valued more on the basis of reserves than on current earnings.
TER: So is this the time to short them?
PS: No. There are too many other easier targets to short—European banks, newspaper companies, hard-drive stocks are some of my favorite shorts. I wouldn’t short oil and gas companies now because, as I said, they’re in this period of massive discovery. If you’ve been following the onshore shale companies the last six months, you know they’ve been doubling and tripling proven reserves, which is making their stock prices jump even though oil prices have been falling for the last several months.
TER: Shifting to natural gas, one of your recent newsletters points out that U.S. natural gas is 75% cheaper than oil, with prices at roughly half of the world’s prices. Extrapolating from there, you say that such a dramatic difference in the price of the same commodity—that commodity being energy in this case—won’t remain for long, because somehow traders will arbitrage and either oil will come down or natural gas prices will go up.
Why would the spread between oil and natural gas, which has existed for quite a few years, begin to reach equilibrium now?
PS: The spread between oil and gas, and between onshore gas and foreign gas, really began to widen in 2008 and basically has continued to widen for the last three years. It hasn’t been arbitraged away yet because it takes a long time for various consumers of energy to make those kinds of changes. Many coal-fired power plants are being decommissioned or switched over to natural gas, but that takes a long time.
It will take five to 10 years to arbitrage away that spread. Meanwhile, the biggest fortunes in oil and gas over the next decade will be made by efforts to arbitrage the global price of energy from America to the rest of the world. These spreads presage a massive change in the oil and gas business in America from acting as a large energy importer to becoming a net energy exporter. This must make peak oil people tear their hair out because why in the world would we export any if we’re running out of it? But enormous efforts are being put toward exporting energy.
Big liquefied natural gas (LNG) export facilities are being built, and there’s some irony to this. One company that I’ve shorted successfully and mocked for almost a decade is Cheniere Energy, Inc. (LNG:NYSE.A). Cheniere Energy existed to borrow a billion dollars and build an LNG import facility. Then it decided that maybe we’re not running out of energy in America after all and changed its port from an import facility to an export facility. That gives you an idea of the sea change that’s happened in the domestic onshore oil and gas business. I haven’t heard any other analyst talking about that kind of change yet, but the realization will soon dawn on the market that America has vast energy resources and will have vast energy surpluses going forward.
TER: We’ve fought wars over the fact that we’re importing energy.
PS: I’m not saying we’ll stop importing energy. We may continue to import oil, for example, because it’s cheaper to produce it in Saudi Arabia and ship it here than it is to produce it here. That doesn’t mean that we can’t be a net energy exporter, though, especially if we export an even larger volume of natural gas.
TER: The Casey organization, Marin Katusa, in particular, follows natural gas, LNGs and its use in Asia. Marin’s recommendations for LNG companies include many located in Indonesia, for instance, because it’s so close to the primary user, China. Given that the U.S. isn’t yet exporting natural gas and that dollars are going into Southeast Asia to build all of these natural gas LNG facilities, have we missed the opportunity?
PS: I don’t think so. Marin is a very good energy analyst, but I think the best way to play Asian energy demand will be American natural gas. I’m not saying that his stocks won’t do well or that there won’t be foreign competitors to American natural gas—there surely will be.
Nevertheless, America’s natural gas infrastructure is an order of magnitude larger and more sophisticated than any other of our competitors in this business. Even though the U.S. doesn’t have export facilities completed yet, that’s a minor piece of the puzzle. What we do have is tremendous amounts of supply and very low prices compared to the rest of the world. We have enormous storage and production facilities that can guarantee supply for decades at fixed prices. No one else will be able to compete with that.
TER: You mentioned earlier Cheniere Energy is part of the shift from building LNG facilities for import to export. Are some other companies interesting to you in the energy export market?
PS: Yes, but first I have to tell you one more thing about Cheniere because it’s so ironic. Guess how many LNG import facilities have been built in the U.S. throughout history? Four. Guess how many of them eventually went bankrupt? All of them. And why?
Because America is the Saudi Arabia of natural gas. We have the world’s largest reserves of natural gas, and the world’s most sophisticated production and storage facilities, by a wide margin. Coming up with a business model to bring natural gas into the U.S. would be akin to a sheik in Dubai importing sand from Chile. It just doesn’t make any sense. It never made any sense, and yet banks gave Cheniere a billion dollars and investors gave it hundreds of millions in equity. When I wrote about it, the newsletter headline was “Madness.” It was completely insane, but it was manna for a short seller because there was no possible way the business could succeed.
Getting back to your question, I know of only two publicly traded ways to play this export LNG business. I’m sure that more of these endeavors will be launched in the next 12 months. For now, ironically, Cheniere is one of the two publicly traded companies in that space, but I’d advise against investing in Cheniere because its capital structure is so impaired by the billion dollars it lost trying to build an import facility.
The other company is Dominion Resources Inc. (D:NYSE), a large integrated power company that has both regulated and unregulated subsidiaries. One of the unregulated subsidiaries owns a facility in Cove Point, Maryland, originally built in the 1960s as an LNG import facility. Of course, it went bankrupt; they all do. Now, Dominion is retrofitting Cove Point to be an LNG export facility. It’s also connecting pipelines from the Marcellus shale in West Virginia and Pennsylvania directly to this export facility. As a result, it’ll be able to take very, very low-cost natural gas out of the Marcellus and export it to the world.
TER: In what timeframe?
PS: The export facility is scheduled to open in either 2014 or 2015. The construction timeline was like five years. These are very massive facilities.
TER: Moving on to nuclear energy, what’s your outlook? Does the post-Fukushima controversy translate into a contrarian investment opportunity in uranium?
PS: I’ve been a big fan of nuclear power, although not necessarily a uranium bull. In fact, I was very bearish on uranium in the 2006–2007 timeframe because I thought it was a bubble. It eventually did collapse, so I was right about that. I can’t say that I’m part of the nuclear bull crowd now, either, but it’s because I’m more and more convinced that growth in conventional energy resources will be greater than people expect, which will continue to marginalize the nuclear power footprint in the world. I’m not saying that it’s going away, but I don’t think there will be as much growth there as everyone else expects.
TER: What does that mean for uranium prices then?
PS: I’d be neutral on uranium, and relatively neutral on large users of nuclear power such as Exelon Corp. (NYSE:EXC), which is a stock I’ve owned in my portfolio and covered in my newsletter for almost a decade. It’s a very safe and sound company, a good way to get a 5% dividend yield. It’s not a bad investment, but I’m just not particularly bullish on it the way I was prior to Fukushima.
Quite frankly, I’m surprised and disappointed that the modern safety standards that we have across these power plants throughout the world didn’t perform better. There’s s no margin of error. You cannot afford to have an accident at these plants.
I’m not saying that we can’t get there, but the facilities we’ve built over the last 40 years have proven to be unsafe. The public is right to be skeptical, and that’s generally going to reduce the construction of new plants. Less construction will cause demand for uranium to disappoint, probably over the next several decades.
TER: What will replace nuclear though?
PS: I’m very, very bullish on natural gas consumption, incredibly bullish, because I think the price is going lower. As the price goes lower, people will use more and more of it. The conventional wisdom now is that natural gas will go from around 20% of global energy consumption to maybe 25% over the next decade. I’m more optimistic than that—I think we’ll see natural gas go to 35–40% of all energy consumption. It could even go higher. It really depends on how cheaply it can be delivered around the world. The greatest opportunity the energy complex has over the next several decades lies in exploiting the technologies that are enabling shale gas production.
TER: And on that good-news note, Porter, thank you so much for taking the time to share your insights and opinions with us.
After serving a stint as the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter, Porter Stansberry began Stansberry & Associates Investment Research, a private publishing company, 11 years ago. S&A has subscribers in more than 130 countries and employs some 60 research analysts, investment experts and assistants at its headquarters in Baltimore, Maryland, as well as satellite offices in Florida, Oregon and California. They’ve come to S&A from positions as stockbrokers, professional traders, mutual fund executives, hedge fund managers and equity analysts at some of the most influential money-management and financial firms in the world. Porter and his team do exhaustive amounts of real world, independent research and cover the gamut from value investing to insider trading to short selling. Porter’s monthly newsletter, Porter Stansberry’s Investment Advisory, deals with safe value investments poised to give subscribers years of exceptional return. You can learn more about Porter and his ideas by clicking here.
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Q: Who said this:
Second, the idea that U.S. economic difficulties hinge crucially on our failures in international economic competition somewhat paradoxically makes those difficulties seem easier to solve. The productivity of the average American worker is determined by a complex array of factors, most of them unreachable by any likely government policy. So if you accept the reality that our “competitive” problem is really a domestic productivity problem pure and simple, you are unlikely to be optimistic about any dramatic turnaround. But if you can convince yourself that the problem is really one of failures in international competition—that imports are pushing workers out of high-wage jobs, or subsidized foreign competition is driving the United States out of the high value-added sectors—then the answers to economic malaise may seem to you to involve simple things like subsidizing high technology and being tough on Japan. [Emphasis added.]
A: Paul Krugman (Pop Internationalism p. 16 , The MIT Press, Cambridge).
In spite of his remarkable daily stupidity, Krugman actually correctly recognizes the problem of American competitiveness in international trade. What hampers America is not foreign trade, but domestic productivity. And one of the biggest hindrances to domestic productivity is government, both at the state and municipal level, and particularly at the federal level. Thus, if one wants to know why Americans are losing manufacturing jobs, one need only look at domestic policy. The federal government has increasingly hamstrung manufacturing jobs over the past several decades.
Furthermore, instead of allowing consumers to feel the pain that domestic production policy would naturally incur, the federal government instead decided to promote increased foreign trade (under, it should be noted, the auspices of so-called “free” trade). This policy has then had the effect of subsidizing foreign production at the expense of domestic production because foreign manufacturers do not have to face the massive regulatory costs that domestic manufacturers face, giving foreign manufacturers a leg up on their competition.
As I have undoubtedly noted before, there are only two correct positions for a domestic government that presumably claims to represent the people over which it governs. Either the government can highly regulate domestic business and place tariffs on imports that approximate the costs faced by domestic producers or the government can reduce the burden of regulation on domestic business in conjunction with the decreased cost of importing. It is, however, quite foolish to do what the U.S. government is doing now: highly regulate domestic business while decreasing the cost of importing. Either a high degree of regulation is desirable or it is not. If it is, whatever regulations that exist should be applied to every person and corporation that wishes to do business in America. If it is not, the domestic market should be deregulated posthaste. There is no excuse for the current state of affairs.