The Energy Crisis Is Here – How to Play It

Oil and gas reserves around the world are growing scarcer by the minute, and people are looking to their governments for answers. However, leaders' responses are often motivated more by the desire to boost approval ratings than by the need to find real, long-term supply solutions. The individual investor may not have the power to shift the tone of the emotional debates surrounding the oil and gas industry, but he or she can devise a strategy to profit. Marin Katusa and Louis James  from Casey Research and Rick Rule from Sprott Inc.’s Global Resource Investments sat down with The Energy Report to discuss what it means to participate in a politicized market and how politics affect their buy and sell decisions.

The Energy Report: When it comes to energy, hasn't the sector always been steeped in politics? Or has the political environment made an even more pronounced impact since the 1970s, for example?

Rick Rule: I think energy markets are even more political now. When I was growing up, the US energy business still had a couple of federal energy regulatory committees. It is really tough to comprehend how badly they screwed up in the 1970s. They trampled and obliterated every market they got into. It looks as though they intend to do the same again. The political response always seems to be an attempt to fix a problem after the market is well on the way to fixing it itself.

We North Americans have been given a tremendous gift, which we can now unlock through technologies that bring the total cost of producing gas down substantially. We're going to enjoy a substantial dividend from that. How that dividend gets spent will not be decided in west Texas or northern Alberta. It's going to be decided in Ottawa and Washington, D.C. That's really a shame, because some of it's likely to subsidize inefficient consumption and energy that wouldn't otherwise work.

Government increasingly shapes energy markets, and rarely for the better, which is truly sad. As an example, the political discussion with regard to fracking is almost anti-science. Fracking has become another "F" word – never mind that it's lowered our cost of energy consumption by half. When critics talk about the potential degradation of groundwater supplies, they suggesting that the frack could somehow impart enough energy to channel through 2 kilometers (km) of very hard rock and pollute an aquifer that might be 100 meters (m) deep. Such unfounded attacks could only happen in a politicized economy. 

Marin Katusa: Another reason why US energy markets are more politicized now is that China's consumption is reshaping global demand. Meanwhile, Russia still has a stranglehold over Europe's natural gas production and distribution, and Putin has been to Israel three times since he was elected this past spring, while Obama is yet to visit Israel during his presidency. Now it's looking as if Russia will become the largest investor for the liquefied natural gas (LNG) facilities in Israel. America may save itself through its ingenuity with shale technologies by being able to replace the low labor costs with low energy costs from natural gas, but because of the increased politicization, America is losing the global resource advantage it once had.

Louis James: Let me pull back to a bigger picture. The theme, "Navigating the Politicized Economy," does not only refer to regulatory burdens, but also to the overall responses of governments around the world to the crisis that we've been predicting for many years. That's the context, not just the minutiae of various enterprises and their regulatory problems, which they all have. It's about how the world is responding to crisis. The response is political and, as Rick indicated, very feelings-driven. It's not a rational or scientific way of optimizing outcomes. It's political, which means pandering to voters, which means doing whatever the larger number of usually less-informed people want, as opposed to whatever science or engineering may determine is an ideal way to do something. That's scary. How you deal with that is more of a philosophical than an engineering question: How do you personally plan your life in a world in which everything is more political every day? I think everybody should be asking that question.

TER: Marin, you pointed out in one of your articles that politically motivated supply chain disruptions – related to military actions, sanctions and such – affect the price of oil to the point that you're projecting an increase in the baseline.

MK: There are a lot of risks out there. A deposit such as Ghawar, which is the greatest producing oil deposit in the world today, was discovered 60 years ago. It is being depleted, but not replaced by new discoveries anywhere near that scale. What if there's a collapse or an engineering failure at the deposit? So many technical and social issues can disrupt the production. If a deposit like that goes down, what happens?

Remember, it's not the old seven sisters that are the largest producers today, but rather politicized economies – the new seven sisters, which are all national oil companies that produce oil from deposits that the original seven sisters developed many decades ago. They haven't brought in the modern technology and entrepreneurship that Rick spoke about to enhance and streamline these deposits. Another factor is that in a lot of these areas, the major exporters are soon to become net importers. Already, about half of what Saudi Arabia produces is consumed domestically, and Mexico may be unable to export oil by the end of the decade.

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