Friday, November 3, 2023
OUCH. THAT HURTS!
Everyone reading this email has either complained about or listened to someone else complain about higher-than-normal gas prices over the last 2 years. I think we can all remember the summer of 2022, when the average price for a gallon of gas in the U.S. was $5.01. It hurt! Especially because, for a lot of Americans, the money they budget for gas isn’t very flexible. They have to drive their children to school and themselves to work. So, when gas prices rise, they simply have less to spend on everything else. For this reason, I wanted to take a look at the current state of the energy sector, and some potential challenges that it may face in the coming year(s).
RUSSIA 3rd LARGEST PRODUCER
According to the US Energy Information Administration, Russia is the 3rd largest producer of oil in the world, producing between 10-12% of the world’s supply. When Russia invaded Ukraine in February of 2021, countries around the world rushed to ban the import of Russian oil. Over the course of the next year and a half, this began to show up at the pump. The response by the US Government was far from stellar. A large portion of the strategic oil reserve was drained, and no real progress was made to ease restriction and allow for more domestic production. We were given a reprieve largely by happenstance. China had a COVID outbreak and shut down large sectors of its economy again. The lack of Chinese consumption helped to stabilize global prices.
Roughly 20 to 30 percent of the world's oil production pass through the Strait of Hormuz.
As you’ve probably noticed, gas prices have dropped back down to near normal levels since 2022. But I don’t think we can relax and take our eye off the energy sector just yet. An even larger threat to global energy could be right over the horizon.
Connecting the Persian Gulf to the Arabian sea is a body of water known as the Strait of Hormuz. Oil exports from Iraq, Iran, Kuwait, Saudi Arabia, and the United Arab Emirates all pass through the Strait of Hormuz. Those 5 countries make up HALF of the top 10 oil producing countries list. 17 million barrels of oil a day, or roughly 20-30 percent of the world’s oil production pass through this small body of water. A broader regional war in the middle east, particularly one involving Iran, would more than likely shut down this vital shipping lane. The effects on global energy prices would be dramatic. This might be one of the contributing factors that lead to the U.S. easing many of its sanctions on Venezuelan oil this month.
NOT ALL GLOOM AND DOOM
However, it’s not all doom and gloom. America remains the largest (and one of the cleanest) producer of both oil and natural gas in the world. The even better news is that America has the ability to increase its production capacity. American shale has and continues to revolutionize our oil industry. In a Forbes article from August of this year titled “Why America’s Shale Boom is Not Over”, author Dan Eberhart writes “shale producers are innovating, using technology and their years of experience in maturing resource fields to achieve production that defies the odds and is surprising oil markets.” However, the biggest obstacle to increasing capacity lays more in the executive and legislative realm than in the actual mechanics of producing more energy domestically.
IN CONCLUSION
I put little to no faith in bureaucrats to solve our problems, but I do put a lot of faith in the American economy’s ability to adapt to changing environments and find a way to meet consumer demand. Above all, I put my faith in the One who stitched the world together and wrote the world’s history before it even began.
I hope you are all having a wonderful week. If you have any questions, feel free to reach out. Or, if you know someone that could use help financially navigating the turbulent times we find ourselves in, send them our way. We would love to help!
M. Grant Pannell
(The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.)
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