MARKET PERSPECTIVE

By J Mulraj

October 28- Nov 4, 2023

US shale is the cheapest, and manufacturing can return

Watch this video by geopolitical analyst, Peter Zeihan. He says that the cost of producing a barrel of oil, through drilling shale in the Permian basin, which accounts for a third of US production, is around $ 11/b. That’s the lowest cost of oil anywhere in the world, including in Saudi Arabia, where it’s over $20. Not only is it the lowest cost,  but it’s also the cleanest and the lowest pollution oil anywhere. (See 1:55).

Manufacture moves where energy is cheap.  In 1973, when OPEC placed an oil embargo after the Yom Kippur war and oil prices shot up in USA, a lot of manufacturing moved out.

With US shale being the lowest cost, the reverse trend can happens and manufacture return to USA. Biden, whose first act as President was to stop leasing of Federal land for fracking, must start thinking logically. Does he want manufacture to come back, providing supply chain security as well as bringing job growth? Does he want to stop going to MBS, to beg him to increase oil production, to bring down gasoline prices in USA before an election? Does he want to have the financial resources to be able to contain, hopefully reduce, the brokeback mountain of US Government debt? Or is he so obsessed with reversing any and everything Trump did, that he is willing to throw the economic baby out with the soapy bath water? He should remember that he is far behind Trump in all opinion polls, for the next Presidential election in 2024.

Such is Biden’s inane antipathy towards shale that he would rather lift sanctions on Venezuelan oil than permit more leases of federal land in USA). Joe, NIMBY does not work for the atmosphere! Whether Venezuela spews carbon dioxide or you do, it all goes into the same atmosphere. In fact, Venezuelan oil is the dirtiest, and requires special equipment to refine, whilst shale is cleaner.

Thanks to cheap and cleaner oil, a restoring of manufacture can help a spectrum of industries. America, already a large producer of nitrogen fertilizer, which uses natural gas, can increase its production, providing greater food security.  All electric wiring requires a coating, which comes from petroleum products, so with cheap shale gas, this can move to America.

In America, the baby Boomers, defined as those born, post WW II, in the period 1946-1964, are retiring. As people near retirement, their investment profile changes from riskier equity to the safer T Bills, which results in a shortage of risk capital. The generation now coming into the work force are called Zoomers, those born between 1997 and 2012. They are much smaller in number, which explains the labour shortage! Which is now at 400,000 and will rise to 900,000 by 2034. So, till 2034 one can expect, in America, both labour and capital shortages, according to Peter Zeihan.

China, too, is facing a demographic challenge, with a fertility rate of 1.28 births per woman in 2020, far below the required replacement rate of 2.1, needed to sustain a population. This makes it riskier for USA to rely on a global supply chain, and more imperative to re-shore manufacturing.

The US has the cheap energy to make re-shoring attractive, but myopic policy that stops it. Though he does not have Covid, Biden refuses to wake up and smell the coffee.

China’s PMI, Purchase Managers Index, fell to 49.5 in October, indicating a contraction of manufacturing activity. Metals prices also dropped, as a consequence.

India’s economic growth story has been impressive, fuelled by a favourable Government profile, and Government initiatives like the UPI, universal payment interface, which, by facilitating digital transactions at no cost to both parties, enables a huge population to participate in the economy, unfettered by the lack of a bank account. India leads the world in digital transactions.

Where India needs to urgently pull up its socks is in governance. Civic administration is woefully lacking in awareness and in the willingness to enforce rules. Three Indian cities are in the list of global cities with the worst air quality. As an example, the Mira Bhayander Municipal Corporation issued a notice to uproot 3000 trees to make way for a swimming pool! It was, fortunately, stopped by public protest. Action ought to be taken against the ones who authorized it and issued the notice, they should be dismissed. It may be a good idea to have training, similar to IAS, Indian Administrative Services, for State level Government officers. Why should India, a leader in IT, need to witness train accidents, as recently occurred in AP? Why should polluting illegal foundries continue to operate in Khairani road in Chandivli in Mumbai, one of the three Indian cities with awful air quality? Why should Maharashtra Government need to be prompted by the centre to look into the pollution problem before it takes action.

In one word – apathy.

In two words – apathy and corruption.

Unless these two are tackled, India cannot become a developed economy, irrespective of its GDP number. It’s polity, too, must join Joe Biden in waking up and smelling the coffee!

Last week the BSE Sensex rose 564 points to end at 64346.

Last week Jerome Powell, Chairman, US Fed, did not raise interest rates and took a dovish stand on future rate hikes. Both US stock and bond markets rallied. This enthusiasm, however, would be short lived. The Atlanta Fed slashed Q4 US GDP growth estimate from 2.3% to 1.2%. October PMI, Purchase Manager Index was 46.7%, indicating a bleaker outlook.

Ditto for China. It’s manufacturing PMI fell to 49.5 in October. It faces a crisis in its realty sector, about 30% of GDP, and very high youth unemployment problems. China’s technological achievements are amazing. It’s fully automated AI driven port in Shanghai handles more container cargo than all US ports.

So America needs to get its act together if it wants to compete. The Dems should re-evaluate their policies, and not cancel any policy of the Trump era simply because.

The coffee has been brewed and is waiting for it to be smelt! Please do, Jo.

Picture Source: https://www.augmentir.com/blog/manufacturers-are-reshoring-at-a-rapid-pace-heres-how-to-get-ready-for-this-growing-trend

Comments may be sent to jmulraj@asiaconverge.com