The Platts Annual Crude Oil Summit was held in London recently and the projections from the conference are incredibly interesting in particular as it relates to global growth and the outlook for the United States' global military footprint. The expected trend in oil production could have a significant impact on how the world models itself in the coming decade and it gives the United States a wonderful chance to get its finances in order. The question is will the opportunity be taken or lost?
The most amazing chart to me is the one below showing the expected flow of oil exports and imports. In years past the heavy blue line would have been pointed directly at the United States but now that the oil found in the shale estimated to be a whopping 7.4 billion barrels, by 2018 it is expected that the United States will only be importing 3 million barrels a day. This is down from a peak of 10 million barrels a day in 2005.
So most of the global oil production and particularly Middle Eastern production will be moving to China and this will change the global landscape tremendously. First of all the United States will be less concerned with protecting its oil supply in the Middle East. The United States has already limited their import to just a hand full of countries and this will more than likely shrink over time. At present over 70% is imported from Canada, Saudi Arabia, Iraq, Venezuela, Mexico and Nigeria and this number should fall further allowing the United States the opportunity to pull back from its overextended military presence in the rest of the world. At present the US spends $680 billion a year on its military (this does not include war expenditure and assisting veterans which takes the number a lot higher) and this number could be slashed closing the budget gap.
Second with more and more oil being sent to China it will become more common for payments to be made in Renminbi rather than dollars. This will create the platform necessary to turn China's currency into a major global currency and will begin the demise of the dollar as the globe's de facto standard. While this will be welcome in certain parts of the world it will have an impact on the United States' ability to finance their large budget deficits. The simple reason is that if China is seen as being a global heavy weight then safety may be found outside of the US reducing foreign capital to finance budget deficits.
Third there is a chance that the oil market itself will become more regional much like the natural gas market. So for example oil produced in the United States and used in the United States will command a different price from Middle East crude shipped to China. As one of the main drivers of inflation is from oil inputs, if the United States can supply much of its own demand then inflationary shocks from limited oil supplies outside of its borders will have minimal impact on inflation. This insulation would allow for a more stable inflationary platform from which to grow an economy.
Fourth is that the trade deficit will shrink and could even move to a positive number. A trade surplus would be very welcome and would allow the country to reduce its reliance on foreign investment to finance deficits. This is one of the reasons that Japan has managed to continue to raise its level of debt while remaining solvent (a situation that will more than likely reverse with the final push by the government to spend more than they should on wasted projects).
Fifth is that the wealth that will be created in the build out of mining operations and the subsequent revenues generated from operations will provide a nice boost to GDP. On the back of this will come some much needed tax revenues which should help to shrink the budget deficit further.
All of this is positive news and gives the politicians another chance at repairing the economic damage but the main question remains, will they take the opportunity presented or once again squander it? I am hopeful that the size of the opportunity is so large that even our lost leaders will not be able to destroy this opportunity. If in fact they continue down the path toward fiscal austerity then this economic boost will be felt and could once again put the United States back in the pound seat in terms of an economic super power. Furthermore as the country becomes more and more insulated the pressure will finally be off to police the rest of the world and that should help with national security which would be worth its weight in gold!
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