View Full Version : How Fracking Could Save the Dollar

12-06-2012, 12:21 PM

Ever since the Reagan years, America has played a singularly important role in the global economy as its largest net borrower.

Thanks to the shale energy revolution, that's beginning to change. The implications for the dollar are profound.

The U.S. is on track to become the world's largest oil producer in eight years and the biggest producer of gas in five, according to the International Energy Agency, which projects energy self sufficiency in 25 years. That remarkable turnaround not only shifts the U.S. relationship with the Middle East but, as economists at RBC Capital Markets predicted in recent research note, will reduce energy imports so far that it will shrink the U.S. trade deficit and eventually convert the current account deficit into a surplus. Inevitably, RBC argues, this will provide long-term support for the dollar.

A current account deficit means a country must finance part of its economic activity with foreign-sourced funds. If it gets too big, a deficit can be a source of vulnerability, especially if that country's government also runs a large fiscal deficit and an excessive amount of public debt.

So with the U.S. current account deficit holding above the International Monetary Fund's traditional danger threshold of 3% to GDP in every year except one over the past decade, there has understandably been some anxiety over the U.S.'s ballooning debts, especially the $16 trillion owed by the U.S. Treasury. Because of this imbalance, the U.S. maintains an awkward dependence on large-scale credit inflows from countries that run big current account surpluses such as China, Japan and Russia, whose governments gain leverage by way of their large portfolios of U.S. Treasury bonds. It provides the alarming context in which the "fiscal cliff" debate occurs in Washington.

The fear is that foreign creditors will one day start to doubt America's capacity to repay its gargantuan debts. If they worry that the government will resort to inflation to lower the debt load, a strategy that would eat into the future value of their holdings and weaken the dollar, they could respond by withholding purchases of dollar-denominated assets.

Whether this happens gradually or involves a full-blown collapse in the dollar along with a sharp spike in interest rates, many economists see the dollar's long term outlook as inherently bearish. In fact, a deficit-driven currency adjustment is seen as necessary to boost U.S. competitiveness and rebalance a lopsided global economy in which the U.S. spends too much and China saves too much.

Enter hydraulic fracturing, or "fracking," the innovation that has unlocked abundant gas and oil reserves trapped in shale rock formations across the country. While shale reserves exist elsewhere, the U.S. enjoys a mix of property laws, regulations and infrastructure that give it a huge lead in this field. A Wall Street Journal report this week noted that previously high expectations for a shale energy boom in other countries are now being downgraded. That means the global energy balance is swinging dramatically in the U.S.'s favor.

What does this mean for America's external financial balance? Well, net U.S. imports of petroleum-related products ran to $326 billion last year, about three fifths of the $560 billion goods and services trade deficit. Generally, the percentage of energy imports has been on a downward track thanks to efficiency improvements and lower prices, but the forthcoming shale output expansion is set to accelerate that trend. This giant component of the U.S. deficit is set to start steadily falling, which means less need for foreign financing.

Eventually, the U.S. will become a net energy exporter and, all things being equal, will lose its current account deficit in 39 years, RBC estimates. However, the bank's economists add that with China boosting consumption and the U.S. poised to benefit from a pickup in global demand for services, the balance could flip considerably faster than that.

The timeframe for these changes is still long, but so is the investment horizon of America's biggest foreign creditors. Their expectations will need to be adjusted now, and that could mean that the market must incorporate a rethink of the dollar's trajectory sooner rather than later.

12-06-2012, 12:22 PM
This is some of the best economic news I have read in a long time.

12-07-2012, 01:08 AM
What if other oil producing countries turn to fracking, too? Or is that technique not useful in the Middle East?

TAlan CB
12-07-2012, 05:34 AM
Great, industry based on oil consumption has greatly accelerated global warming....leading to droughts in various parts of the world.....and is now going to destroy our ground water supply. I am sure someone is going to point out that there is no definitive proof for this (though there is considerable), but these are the same people who said there was no global warming. Fortunately for these dinosaurs, most of them will have lived a long healthy life before the consequences are realized (including myself), but It will be sad when our children and grandchildren will remember us with curse for what we have left them.

12-07-2012, 05:54 AM
What if other oil producing countries turn to fracking, too? Or is that technique not useful in the Middle East?

Other oil producing countries have been fracing for a very long time.
They have been fracing in parts of the Middle East and China for decades.

What’s relatively new in some countries is horizontal drilling.
Like other new great technological advances this is allowing a great transformation in energy resources and creating great amounts of prosperity for entire nations.
From what this article says it will be a big part of bailing out our nation from its financial mess.
The best news is that nobody is going to stop this advancement for mankind from happening.

12-07-2012, 08:22 AM
Exactly my question. There are massive, I mean MASSIVE fields all over the world. It isn't like we are going to be the only country leveraging this new method. We may be the first to the party in a big way, but we wont be the only one.

In fact, US companies will gladly do all that FRAC'in over seas if they can make more money doing it. In my humble opinion, that is just a matter of time. We are not likely to make it easier on them.

I hope we get a nice boost, but I'm not counting on anything really sustained for decades.

I think the main point is that we can now provide our energy. So while the companies may expand and frack elsewhere, the US is no longer dependent on these other areas for our own energy. This is excellent, assuming we can be environmentally conscious.

12-07-2012, 08:36 AM
You are right. That is indeed a big win for us. I guess the part I take exception with is that we will, for any real long term, be a major exporter. I suspect the whole world is going to see a more energy independent renaissance.

I took exception to that part as well. I fail to see how will be an exporter when other countries, especially China, Russia and the Middle East, will not sit idly by while failing to capitalize on their own energy reserves. Energy independence for everyone would be nice.