Yesterday I discussed how the decline of US shale oil is a looming threat to the global economy.
After saving us from a worse outcome post-2008, it seems as though waning production could tip the scales the other way in 2023 — a key factor that could lean into the ‘Big Loss’ that my colleague Vern Gowdie believes is coming.
Check out this link to hear more about what Vern has to say and how you can protect your wealth!
Because while I’m not as pessimistic as Vern may be, I do see challenges on the horizon for investors. Oil, though, for my money, may be the biggest of them all.
After all, as I alluded to yesterday, if the US begins to bow out as a major producer, it could leave the market in the hands of the OPEC cartel once more.
That is unless investment picks up in other areas…
The demise of shale
The reason that US shale oil is heading toward decline is clearly due to a lack of capital. As oil industry experts told the Financial Times:
‘“We produced too much oil and competed with Opec,” says Pioneer boss Sheffield. “We actually lowered the price by $20 to $30 per barrel over the past 10 years to the detriment of losing our entire investor base.”
‘The shift, says Sheffield, has been from an industry that spent 100 per cent of its cash flow on growing production to one that only reinvests 40 to 50 per cent, with the aim of growing between 0 and 5 per cent.
‘After a decade of deep shale losses, investors are enjoying the new model — and wary of making more risky bets on a sector with a bad record and an uncertain future in a decarbonising world.’
This is exactly the issue that our resident commodities expert, James Cooper, has been warning people about. There is a severe lack of reinvestment from mining and energy companies in new projects.
Shale oil, though, may be the biggest example yet. Because while it isn’t a dead industry yet, it likely will be if investor appetites don’t begin to shift.
The problem is that it’s hard to imagine that changing anytime soon.
The US oil companies have given shareholders a taste of share buybacks and dividend payouts, things that are hard to take back. And so, while the profits will keep investors happy in the short term, it will come at the cost of shale’s growth long term.
All of which begs the question, who will fill a shortfall of American oil production?
Well, the answer might just be India.
From importer to exporter
Just like the US before the shale boom, India is in a precarious position when it comes to its oil needs.
India is currently the third-largest importer of oil in the world, trailing just behind the US and China. But, compared to both, its appetite is growing far faster, with a 7.7% increase in oil imports for 2022.
That is naturally going to place the Indian economy at the mercy of the market — something that could have hampered the US in the wake of the GFC if it weren’t for shale. This is precisely why some of the biggest oil companies in the world are now looking to invest in Indian oil and gas…
As oilprice.com reports:
‘But this month, India’s oil minister Hardeep Singh Puri stated in a speech that oil majors including Chevron Corp, Exxon Mobil Corp, and TotalEnergies have all shown interest in India’s oil exploration and production sector.
‘India has largely untapped oil reserves that it wants to develop rapidly, while oil demand remains high. But it will require a significant amount of FDI to achieve this. If successful, India could reduce its reliance on foreign powers for its oil supply and enhance its energy security.’
Furthermore, it’s not just exploration either. India has quickly become a major refiner as well. And with demand for oil only growing, expect this industry to thrive as well:
‘India has a refining capacity of 248.9 MMTPA and is the fourth-largest refining power globally after the United States, China, and Russia. It has come a long way over the last decades, from a refining deficit in 2001 to becoming self-sufficient and exporting a large quantity of petroleum products today.’
When you factor this in, it is hard to imagine that India won’t become a major oil player. Because, just like the US, they have a dire need to shore up their economy by investing in reliable energy sources.
The irony, of course, is that the US is now the biggest buyer of refined petroleum products from India. But that is simply a testament to the decline of US oil and the rise of their Indian counterparts.
However, none of this will happen overnight. It will almost certainly take years for Indian production to ramp up to any meaningful level. This is why you shouldn’t be shocked by more volatility in the short term — the kind of volatility that could lead to the ‘Big Loss’.
But, if you’re in the market for the long term, Indian oil is one trend I’d certainly be keeping an eye on.
It may not be as explosive as the US shale boom, but it certainly could surprise in the coming years.
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.