At the Financial Times, managing director of foreign exchange strategy at UBS Mansoor Mohi-uddin says that Shale Gas will be instrumental in shifting the trade balance of the US that should translate to a stronger US dollar.
The future of the dollar is more likely to be determined in the shale gas and oilfields of Dakota and Texas than in the sovereign wealth funds of Asia and the Middle East. This is because striking new technological developments are set to transform America’s energy supplies, significantly improving the US balance of payments and the long-term outlook for the greenback.
The US’s current account deficit has been a longstanding drag on the dollar. At the height of the credit boom in 2006, it reached $800bn or 6 per cent of gross domestic product. Though the deficit has halved as the credit crunch has lowered imports, it still stands at 3 per cent of GDP, largely because the US, like the eurozone, Japan, China and India, remains a major energy importer, with annual net foreign oil purchases of $300bn a year. As the US economy slowly recovers, the International Monetary Fund expects the US current account deficit to start rising again. That would lead to foreign central banks accumulating greater reserves of dollars.
But such straight-line forecasts are likely to be challenged as the US’s shale gas and “tight oil” reserves are commercially exploited over the next few years. The US has vast reserves of shale gas but, until recently, energy companies were unable to tap the gas trapped in shale rock. Now, through hydraulic fracturing or ‘fracking’, US reserves of economically available gas supplies have started to rise sharply.
While I am in accord that shale gas is the future of energy, a lopsided focus on energy as driving the US dollar risks a substantial diagnostic error.
Trade balances are largely influenced by policies, directly or indirectly. Policies which promotes boom bust cycles and increased government spending (or the debt culture) stimulates consumption activities at the expense of production, thus boost trade deficits. So even if shale gas may reduce US dependence on foreign energy, growth of consumption activities will expand to other sectors.
Today, the declining share of oil imports (above chart courtesy of Mark Perry) relative to consumption has hardly been a factor affecting the US trade balance—the latter which suffered a major bump from the 2008 recession or crisis (chart below tradingeconomics.com).
In short, the above only exhibits that there has been a shift taking place in import activities from oil to the other sectors.
The US dollar has hardly strengthened because of the improving oil trade balance but instead has functioned as a du jour shock absorber from the unresolved crisis from 2008 which lingers on today through the Eurozone.
And another thing, the Fed’s money printing activities relative to other central banks will drive the destiny of the US dollar more than just shale gas output. Money is never neutral.
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