How Shale Gas Is Leading To Energy Independence

Two articles concerning shale gas have caught my attention this morning. “The Death of Coal” reflects the view of some that under current EPA policies coal will continue to lose ground to natural gas as the fuel of choice for electricity generation. Cheap and relatively clean natural gas is eating into the demand for coal and EPA regulations on some of the more harmful pollutants released by burning coal are adding fuel to the fire. Abundant and cheap natural gas has certainly pressured the stock prices of some E&P names recently, but low prices will create their own demand.

Another piece from UBS makes the case that as the U.S. reaches energy independence this will increasingly provide support for the USD. The U.S. has been an importer of crude oil for as long as any of us can remember (currently estimated at $300BN), but that is changing as new domestic discoveries are reducing the need for imports. The revolution in shale gas as well as new discoveries of oil (North Dakota now produces more oil than OPEC member Ecuador). This will eventually reduce the drag on our trade deficit of being an energy importer, and could well be supportive for the US$. Over time it will reduce U.S. reliance on the Middle East, and by reducing global trade imbalances could slow the growth of sovereign wealth funds.

Devon Energy (DVN) is squarely in the middle of this (and incidentally just reported strong earnings yesterday morning). We also continue to like being long USD versus the Euro. Short the Euro is a nice form of tail risk insurance. While a Greek default is still unlikely, some European finance ministers are reportedly more sanguine at that prospect should Athens fail to sign up to the latest austerity plan. Neither outcome makes the Euro attractive.