3. How does energy strategy impact the outlook for trade and globalization?
In many ways, U.S. access to shale stands at the center of a restructured world order. With new technologies like horizontal drilling combined with high power hydraulics referred to as fracking, the energy industry is now able to harness these massive deposits profitably below $50/barrel. Globally, known shale deposits represent more oil than Saudi Arabia and Russia have combined. Much of that resides in the United States, which is why we are no longer dependent upon international oil imports.
Energy independence is what allows the United States to remove our carrier group from the Persian Gulf. This alone fundamentally alters the geopolitical landscape. The Persian Gulf and its surrounding states represent in excess of 30 percent of world oil production. Therefore, it has been critical for the United States to maintain open trade routes for the oil to flow.
These and other factors lead us to believe that over time, the global order will devolve into significant regional trading blocs. They are not all that different from today’s global economy, but with greater economic integration within each bloc. I could see a North/South American trade zone that runs from Canada to southern Argentina. Strong regional compacts including China, Russia, India, Japan and South Korea could dominate Asia. International trade would become a bit more bifurcated by region as a product of regionally focused re-industrialization enabled by new technologies such as 3D printing. Issues of cyber security and national security of productive capability will help push in this direction, as well.
From an investment perspective, this keeps us aware of potential risks and opportunities. For example, investments in key integrated energy companies might make sense as Russia and the Middle East devolve into regional conflict. As major oil producing areas become less stable, companies capable of delivering critical supplies, technology, and infrastructure worldwide could be in high demand. Longer term investments in companies with leading edge technology in areas such as 3D printing, robotics, artificial intelligence, technology infrastructure and communications will could prove to be highly profitable as those areas grow in economic importance. In the United States, if we get public policy leadership in the realms of education, training, and infrastructure, we could see rapid growth in those industries. Importantly, avoiding investments in expensive industries with demographic and technological headwinds will help to insulate portfolios against these significant structural world changes.
By now it should be evident that in a world becoming increasingly smaller due to technological innovation, seemingly disparate issues are in fact directly related. Changing the nature of the geopolitical order implies potentially major change to how business is done. Whether the change is being driven by competing governments, economic systems, public policy, ideology, technological
change, demographics or even religion, it helps direct policies that create better outcomes. Understanding the root causes of the movement towards change better informs the responses as to what is likely or feasible. The intersection of these interrelated issues is where we need to focus our leadership, our resources, and our energies in order to ensure that the real world ends up with more positive outcomes in the wide range of the possible.
We recognize that such big picture trends take years, if not decades, to influence market direction, and we do not view our research as a conduit to market timing. We always bear in mind, however, that understanding the markets means understanding the course of policy, international relations, and the way regional economies interact on the global stage.
Paul Cantor, CFA, AIF, CFP, is principal and chief operating officer at Allegiant Private Advisors.