Global Real Assets

A bi-weekly discussion of the recent commodity, REIT, and real asset markets and what it may mean for investors.

December 1, 2016

John LaForge, Head of Real Asset Strategy

U.S. Energy Independence—Fact or Fiction—Part I

  • The U.S. is not energy independent. It is a future possibility however, should the U.S. transition away from oil.

What it may mean for investors

  • U.S. investors need to pay attention to non-U.S. oil producers, such as OPEC, as they continue to matter.

Oil is back, front and center, in world news. Yesterday, OPEC finally decided, to cut oil production. This was after one of the steepest two-year drops in global oil prices, since 1859 (when oil was found, and first produced in the U.S.). The response to the production cut was understandably positive—with most oil-price blends jumping anywhere from $3 to $4 per barrel, over the past two days. Our take is that OPEC’s action will likely help solidify a price floor for oil above $40 per barrel, with oil expected to trade in a range between $45 and $60 per barrel most of the time. This should be the case for the remainder of 2016, and the beginning months of 2017. For more on OPEC’s impact on oil prices please see our Global Real Assets report, “Why OPEC’s Oil Production Cuts Matter.”1

Now, with that out of the way, we’d like to shift to today’s topic—U.S. energy independence. It is a subject that comes up often with clients and investors. And understandably so; the goal of energy independence has been discussed by every U.S. president, since President Nixon. It also happens to be a very large subject, so we’re not going to cover every nuance today. In Part I, we’ll discuss the facts as they stand today. In Part II, which will be released in a few weeks, we will tackle the potential timing and likelihood of energy independence.

Let’s begin with our most asked question—is the U.S. energy independent? The quick answer is no, it is not. Chart 1 shows how much energy the U.S. consumes (blue line) vs. how much it produces (red line) on a yearly basis. The gap between the blue and red lines represents how energy-dependent the U.S. really is. The term energy in Chart 1 refers to the primary energy sources that the U.S. produces and consumes, such as coal, oil, natural gas, biomass, etc. So, even after the U.S. shale revolution of recent years, and all the extra oil and natural-gas production that ensued, the U.S. remains comfortably— energy-dependent.

Chart 1. U.S. Energy—Consumption vs. ProductionChart 1. U.S. Energy—Consumption vs. ProductionSources: BU.S. Energy Information Administration (EIA), Wells Fargo Investment Institute, 11/30/16. Yearly Data: 1950-2015. A Btu, short for British thermal unit, is a basic measure of thermal (heat) energy.

But isn’t the U.S. producing record amounts of energy? Yes, it is. The U.S., however, continues to consume more oil than it produces. This can be seen in Chart 2, which highlights that the U.S. consumes roughly 6 million barrels per day more than it produces. The shale revolution has helped close the gap in recent years, but investors need to be clear on this—shale or no shale—the U.S. continues to be dependent on oil imports. This is why topics like OPEC production cuts should matter to U.S. investors.

Chart 2. U.S. Petroleum—Consumption vs. ProductionChart 2. U.S. Petroleum—Consumption vs. ProductionSources: U.S. Energy Information Administration (EIA), Wells Fargo Investment Institute, 11/30/16. Yearly Data: 1950-2015.

As far as U.S. energy independence is concerned, it is oil that is the main obstacle. The U.S. pretty much consumes what it produces when it comes to natural gas, coal, nuclear, and hydropower, as shown in Table 1. Oil, on the other hand, is an energy source that the U.S. continues to need lots of from outside sources. This is highlighted in the last column of Table 1. A deficit, or negative number, means that the U.S. is dependent on outside sources to fulfill its consumption needs.

Table 1. Silver TechnicalsTable 1. Silver TechnicalsSources: U.S. Energy Information Administration (EIA), Wells Fargo Investment Institute, 11/30/16. Amounts may not add up due to rounding. As of yearend 2015.

So, which part of the U.S. economy is using so much oil? The answer is transportation. Nearly all energy used in transportation comes from petroleum (basically oil), which can be seen in Chart 3.

Chart 3. U.S. Transportation Consumption by Energy SourceChart 3. U.S. Transportation Consumption by Energy SourceSources: U.S. Energy Information Administration (EIA), Wells Fargo Investment Institute, 11/30/16. Yearly Data: 1950-2015.

And transportation is not a small part of total energy consumption in the U.S. Chart 4 highlights the four major U.S. energy consumers, and transportation is the second largest (blue line).

Herein lies a possible solution to U.S. energy independence; push the transportation sector away from oil. Should the transportation sector move in a more meaningful way toward renewables, and natural gas, the U.S. could very well become energy independent. As for when this could happen, we’ll leave that for Part II.

Chart 4. U.S. Energy Consumption by SectorChart 4. U.S. Energy Consumption by SectorSources: U.S. Energy Information Administration (EIA), Wells Fargo Investment Institute, 11/30/16. Yearly Data: 1950-2015.

1 Global Real Assets Strategy Report, November 3, 2016.

Risk Factors

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.

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