US Energy Dominance Crumbles - Cash In On The Looming Global Gas and Oil Crisis

• The geopolitics of energy and resources are more important now than in recent years due to supply chain issues and potential balkanization.
• U.S. shale oil and gas production is declining faster than expected, ending the period of U.S. energy abundance. Shortages are likely ahead.
• Demand for natural gas continues to be underestimated, especially from developing countries like China and India. Supply growth may not keep up.
• Renewables like wind and solar are less energy efficient than gas or nuclear power. Their growth has been enabled by cheap money and energy.
• Policymakers and investors should prepare for higher energy prices and more volatility as geopolitics affects supply and demand.

Investing in the New Age of Energy Geopolitics

Energy markets are entering a new era defined by intensifying geopolitics that will shape supply, demand, and prices for the foreseeable future. Gone are the days of energy abundance enabled by the U.S. shale revolution. Investors must understand how geopolitical risks and global supply and demand trends are rapidly evolving to make sound investment decisions.

The Rise and Fall of US Energy Dominance

The US shale oil and gas revolution made the country an energy superpower once again. Crude oil production nearly doubled from 5 million barrels per day (bpd) in 2008 to nearly 13 million bpd in 2019. Natural gas output surged 56% over the same period. This unexpected boom made the U.S. the world's largest oil and gas producer and a net exporter of energy.

However, the immense size of this resource is finite, not infinite. Across major shale basins, both oil and natural gas production are now in decline. The Eagle Ford and Bakken oil fields are shrinking rapidly. Natural gas production has fallen everywhere except Haynesville, which will soon peak. The mighty Permian Basin could roll over as early as 2023.

In short, the period of US energy abundance and security enabled by shale is likely over. Production is dropping faster than expected. Energy shortages loom, ending a decade of relatively low and stable energy prices.

Natural Gas Demand Growth Outpacing Supply

While supply is set to shrink, global demand for natural gas may be substantially underestimated. Growing emerging market economies like China and India have enormous energy needs. Historically, these countries relied on cheap, abundant coal. But as incomes rise, populations demand cleaner air. This drives a switch from coal to lower-emission natural gas.

The desire for cleaner air as living standards improve creates a feedback loop where energy demand rises along with the share of natural gas in the energy mix. Despite fears of oversupply, analysts have repeatedly underestimated this demand growth over the last 20 years. Major new sources of liquefied natural gas (LNG) supply like large projects in Qatar only provided a temporary glut. Demand from China and other Asian nations quickly absorbed the excess. U.S. shale gas helped crash prices for a while, but exports are now steadily rising.

Overall, global natural gas demand has outpaced new LNG supply, keeping prices consistently high relative to oil. Investors should be cautious of predictions that large new LNG export projects will crash prices. The demand outlook remains strong.

The Role of Energy Efficiency

Another key factor shaping future energy markets is energy return on investment (EROI) - how much usable energy is produced per unit of energy invested. When energy is cheap and abundant, the efficiency of different sources matters less. Renewables with relatively low EROI like wind and solar saw massive growth in the last decade.

But as energy becomes more scarce and expensive, the most efficient sources with the highest EROI will be favored. This means nuclear power and natural gas are likely to displace costly renewables reliant on huge material inputs and redundancy. Nuclear is vastly more efficient than any renewable technology.

For now, excessive financial liquidity has masked fragile underlying energy economics. But substance will eventually prevail over perception. As energy security concerns mount, markets will gravitate back to what is dependable, affordable and efficient.

Investment implications arise from these energy market trends

• US shale producers face production declines without the profits to sustain themselves long-term at lower oil prices. Be selective in choosing survivors with superior assets and disciplined operations.
• Natural gas prices are headed higher globally on tightening supply and rising demand. Gas-weighted producers and export-oriented LNG facilities should benefit enormously.
• Capitalize on periodic selloffs in uranium miners, nuclear technology firms and engineering/construction companies specializing in nuclear plants. The unwarranted investor dislike offers value.
• Exercise caution before chasing eye-catching renewable energy stocks. Many sport-inflated valuations are divorced from real energy economics. Focus on well-run companies with viable current profits.
• Maintain meaningful portfolio exposure to energy for resilient cash flows and inflation protection. Geopolitical flashpoints and supply crunches will drive recurring price spikes.

The shale revolution provided a false sense of permanently ample and affordable energy. But the realities of depletion, age-old geopolitics and demand growth are reasserting themselves. Investors should be positioned for the new era defined by these forces in global energy markets.