Gassed Up

William Conway, co-founder and co-CEO of the Carlyle Group, the world’s third largest private equity firm, does not seem particularly perturbed that fellow private equiteer Mitt Romney, founder of rival Bain Capital, failed to unseat President Barack Obama.

Last week he provoked torrents of enraged froth from readers of the Wall Street Journal, especially those quixotically convinced Obama draws inspiration from Karl Marx. His sin was a column explaining why Carlyle had committed to invest $4.4 billion in US equity in the first three quarters of this year versus $4.2 billion in the rest of the world.

It is time, says Conway, to stop being “mesmerized” by the rhetorical excesses of the election season and “paralyzed” by the partisan theatre of the “fiscal cliff” federal budget fight, and look, instead,  at facts. “Nowhere on the globe can my firm invest with as much confidence as we do in the US.”

Having put billions of investors’ money to work “from Shanghai to St Louis, Sweden to sub-Saharan Africa”, Conway worries Americans take too many of their relative strengths for granted – freedom, rule of law, universities that attract the world’s best and brightest, deep and liquid capital markets and innovation hubs like Silicon Valley.

More debatably, he includes in his list of underappreciated national assets “confidence in regulatory agencies” and “peerless medical systems”.  The former took a beating in the subprime mortgage debacle.  If there is one thing that is peerless about the US health care system it is the share of GDP it consumes (17.9 per cent in 2011) with outcomes inferior to those in countries that spend far less. The technology is good, though.

Conway returns to firmer ground when he says the US economy offers investors a “powerful combination” of safety and growth.

Trillion dollar deficits and fiscal cliff jitters notwithstanding,  US debt,  both government and high-grade corporate, has remained the global haven of choice in uncertain times.  As a result, interest rates are at record lows, ready to prime the next expansion signs of which are visible in what Conway sees as sustainably recovering housing market.

Another major boost, he and many others think, is the revolution in domestic energy production already under way as the US taps the vast reserves of shale gas and “tight” oil which hydraulic fracturing and other unconventional recovery technologies are bringing on stream.

Nobody is talking about “peak oil” these days. By 2020, the International Energy Agency projects, the US will have overtaken Saudi Arabia as the world’s largest oil producer and could be energy self-sufficient by 2025. Recoverable shale gas and related hydrocarbon reserves in the continental US excluding Alaska are put at over 3 500 trillion cubic feet, 100 years supply at current consumption levels.

If energy guru Daniel Yergin and his IHS research firm are right, 1.7 million jobs can already be attributed to the bonanza, many of them in state likes Ohio and Pennsylvania which were critical to Obama’s reelection. For perspective, that is twice the total current employment in the US automotive industry, parts suppliers included. By 2020 the number could rise to 3 million, IHS predicts.

Another private equity firm, Kohlberg Kravis Roberts calculates that it will take $2 trillion in investment in upstream production and $205 billion in pipeline infrastructure to exploit the resource successfully between now and 2035.

The knock-on effect is expected to be substantial. Price Waterhouse Coopers has identified a range of companies – Dow Chemical, Chevron Phillips Chemical, Bayer, Shell – that are building or planning new capacity to exploit abundant low cost feedstock.   A Sasol gas-to-liquids plant producing low sulphur diesel is due on line in Louisiana in 2017. Steelmaker Nucor will use shale gas in a new direct reduced iron facility. Other steelmakers are investing in new capacity to supply pipe. And that is just the beginning.

The geopolitical implications of an America no longer development on foreign energy sources are also starting to get attention.  Yergin points out the increase in US oil production since 2008 represents about 80 per cent of what Iran was producing before sanctions were imposed.  Falling US import demand mean Iran’s contribution to global supplies is less likely to be missed, making the embargo more effective

Some question whether the bonanza can last. There are fears gas may prove harder and more expensive to recover over time. There are also environmental concerns both about the impact of the drilling itself and about a glut of low cost hydrocarbons will affect development of renewables.

For now, though, the energy story is providing some very encouraging light at the end of the Great Recession tunnel and at the start of Obama’s second term.

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