Global Market Commentary

February 06, 2014

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Coals to Newcastle, Gas to the Gulf

U.S. Shale Continues to Reshape Global Energy Markets and Alliances

Last year, the United Arab Emirates (UAE) awarded a contract for the construction of a liquefied natural gas (LNG) import terminal. Yes, you read that correctly, as counter-intuitive as it may seem, the UAE has been a net importer of gas for several years. It has made public deals with Canadian producers, and unofficial sources say that it has now entered into negotiations with U.S. producers to import U.S. shale gas. If so, it will be a stunning and symbolic event.

Gulf States’ Rapidly Growing Populations…and Energy Needs

Like other Gulf states, the UAE has built a technologically modern society with high energy needs, especially for air conditioning and for desalination plants. Some states, such as Saudi Arabia, burn increasing amounts of crude oil for these purposes. We read last year that on particularly hot summer days, Saudi Arabia now burns nearly a million barrels of crude to generate electricity. While Saudi Arabia does produce gas, petrochemical, and other industrial uses get priority over power generation in the Saudi plan. And further, gas there is largely a byproduct of oil production, which falls under OPEC production limits.

Apparently, the UAE has decided strategically on natural gas as a solution for now, judging perhaps that it will be better off selling its crude and importing gas for power generation. The U.S. still doesn’t permit the export of any of its newly abundant crude, and hunger for imports in China, India, Indonesia, and other developing nations will continue to grow.

A Rock and a Hard Place

Many of the Gulf states face similar energy problems. Their populations are large and rapidly growing. They suffer from the “resource curse” — oil has given so much wealth to their economies that they have grown relatively little other business (though some have done better than others). And so their large, young populations often face poor prospects for finding meaningful work, and instead are placated by government handouts. Many critics believe that this situation has fuelled the rise of extremism and Jihadist sympathies among young men.

Facing all of these challenges, Gulf states have been anxious to keep their alliance with the U.S. strong. But as we observed in this letter recently, America’s growing energy independence is making them nervous.

Show Me the Money

The price of crude quadrupled between 2000 and 2008, driving U.S. net energy imports much deeper into deficit territory.

US Balance of Trade

The technological revolution that has unlocked so much American shale oil and gas was underway well before
that time, however, the rapid development and application of these technologies were spurred by economic reality.
In 2008, U.S. net energy imports hit 2.8 percent of GDP. Now, thanks to fracking, they have almost fallen
to just half of that.

The UAE’s new import terminal symbolizes this new world. Even just a few years ago, the idea of U.S. energy
exports to the Middle East would have caused disbelief. The U.S. used to be tied to the Middle East for the
security of its energy supply — and that bond is being loosened.

We are sure that as the effects of the shale revolution ripple out, they will reshape U.S. relations with the 20th
century’s big oil producers — and, very likely, with the world’s rising energy consumer — China.

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