(Bloomberg View) — For OPEC, Russia and other nations that have lived off oil for decades, and little else, the worst case scenario is about to become the present tense scenario. America has discovered the magic beanstalk and it is named “shale oil production.” The U.S. now has the ability to not only be energy self-dependent but it can become a major exporter of oil and natural gas and spin the world on its axis. America now owns the magic beans, and all it needs to do is plant them and water them with care.
OPEC can’t quite believe it and the cartel is in denial. The markets can’t quite believe it, either, as OPEC spews the nonsense that we have listened to, and believed in, for far too long that it can control supply and, therefore, prices.
Bloomberg News stated it quite clearly:
OPEC’s output cuts aren’t working. Production from Libya and Nigeria is threatening attempts to rebalance the market, the IEA said. The agency also warned that rivals from the U.S. to Brazil will crank up production by the most in four years in 2018, outstripping demand. The API yesterday said U.S. inventories unexpectedly rose 2.75 million barrels last week.
Those are the most recent facts but the question is what is the U.S. going to do about it? I was in Washington last week suggesting government involvement with our oil production. This is not something I would suggest often, or lightly, but there are circumstances where the government can encourage industries with tax credits and import duties to further our internal growth and expansion. I believe this is one such case.
The government can provide some real incentives, as oil and natural gas production is not just a matter of economics, but of national security as well. Many of the OPEC nations support the terrorist organizations that are claiming lives in both America and Europe. If we can minimize their income, and perhaps even bankrupt some of these hostile nations, then the U.S. is protecting its people and interests.
Military force is always the plan of last resort. I believe that increasing our internal oil and gas production, and boosting our exports of both, may eventually cause changes in some foreign governments and perhaps even spark revolutions and insurrections.
America’s increase in energy production also has another side, which is a tremendous boost to the revenues of energy companies. This means more tax revenue for the government and the numbers are so large that balancing the budget, if not cutting our deficit eventually, are possible. For America, nothing but win and win and win. For them, “not so much.”
I have also proposed tax credit for research and development for U.S. shale oil producers. The faster the technology is improved, the more revenue is generated, and the lower the cost to produce a profit.
The larger issue here, though, is the governmental programs of many of these nations, which can’t be supported at the current price of oil and natural gas. The U.S. doesn’t have this issue as we are not a one pony state. We can then use this to our advantage if America just concentrates and gets this job done.
Perhaps my idea of taxing imported oil isn’t politically possible. There are also other means to arrive at the same destination. We could tax utility companies or refiners or chemical companies for using imported oil. We would impose no taxes for using our own oil and natural gas. There is more than one means to get the message across.
As for investments, if we begin to head down this path, I would look to the bonds and equities of the American shale oil producers as interesting options for substantial growth. The numbers could be explosive, if the government steps in with an assist. I would keep my eyes on this sector of the market now.
Mark Grant is a managing director and chief strategist at Hilltop Securities.