Shale Gas Won’t Boost the US Dollar

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.

Writes Mr. Mohi-uddin

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.

The US Energy Consumption Story: Americans Are Better Off Today

The US Energy Information Administration (EIA) reports, (emphasis mine)

While most home appliances have become more efficient over the past 30 years, the average U.S. household uses many more consumer electronics —in particular, personal computers, televisions and related devices, according to data released today by the U.S. Energy Information Administration (EIA) in the latest update to its Residential Energy Consumption Survey.

EIA on Household Devices

US households have increasingly been using more luxury items and convenience related devices than in the past.

Appliances and Electronic devices accounted for 31% of energy use in 2005 than in 1978 where energy use accounted for 17%. Moreover, air conditioning and water heating likewise reveal of the same story where energy use has materially increased today (8% for aircon and 20% for water heating), than in the past (3% and 14%).

EIA on Energy Intensity

And since energy intensity has been materially declining, this translates to even more intensive use of these devises.

This also is a great example of the Jevon’s paradox at work, which according to Wikipedia.org is the proposition that technological progress that increases the efficiency with which a resource is used tends to increase (rather than decrease) the rate of consumption of that resource.

Wikipedia.org on Jevon’s Paradox

Bottom line: Compared to the views of the permabears, gains from increased fuel efficiency and technological progress (brought about by capitalism) highlight the fact that American living standards have vastly improved over the past years, despite the stagflation, recessions and financial crisis.

Consumer Electronics, Energy and the Jevons Paradox

The explosion of consumer electronics globally has been putting pressure on energy consumption.


This from the New York Times,

``Electricity use from power-hungry gadgets is rising fast all over the world. The fancy new flat-panel televisions everyone has been buying in recent years have turned out to be bigger power hogs than some refrigerators.

``The proliferation of personal computers, iPods, cellphones, game consoles and all the rest amounts to the fastest-growing source of power demand in the world. Americans now have about 25 consumer electronic products in every household, compared with just three in 1980.

``Worldwide, consumer electronics now represent 15 percent of household power demand, and that is expected to triple over the next two decades, according to the International Energy Agency, making it more difficult to tackle the greenhouse gas emissions responsible for global warming.

``To satisfy the demand from gadgets will require building the equivalent of 560 coal-fired power plants, or 230 nuclear plants, according to the agency.

``Most energy experts see only one solution: mandatory efficiency rules specifying how much power devices may use.

``Appliances like refrigerators are covered by such rules in the United States. But efforts to cover consumer electronics like televisions and game consoles have been repeatedly derailed by manufacturers worried about the higher cost of meeting the standards. That has become a problem as the spread of such gadgets counters efficiency gains made in recent years in appliances.

``In 1990, refrigerator efficiency standards went into effect in the United States. Today, new refrigerators are fancier than ever, but their power consumption has been slashed by about 45 percent since the standards took effect. Likewise, thanks in part to standards, the average power consumption of a new washer is nearly 70 percent lower than a new unit in 1990."

Read the rest here.

In short, regulations which try to conserve energy by forcing technologically based efficiency on consumer electronics has resulted to an unintended consequence-exploding demand.

This is the Jevons Paradox or the Jevons effect at work.

From wikipedia.org, ``In economics, the Jevons Paradox (sometimes called the Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource. It is historically called the Jevons Paradox as it ran counter to popular intuition."

Hat Tip: Paul Kedrosky