Without supplies – whether it’s energy or food – a nation and its economy will quickly collapse.
We’ve see it proven time and again through history.
Whether it’s World Wars I and II, the Punic Wars, the Napoleonic Wars, Middle East wars, or the U.S. Revolutionary and Civil Wars, if you control the supply lines, you control the war and its outcome.
The Europeans know this more than anyone else.
Throughout history, barely a decade passes without one European state declaring war on another…or a civil war or revolution tearing a nation apart.
So, it’s essential to secure supply lines.
But it’s not military supply lines I’m talking about today – although you shouldn’t rule out the prospect of war, revolution or civil war in Europe at some point.
Securing supply lines is just as important in peacetime as in wartime. And one of those supply lines is crucial during both. I’m talking about energy.
To understand the scale of Europe’s problem, consider this, from a September 2011 report from the European Commission:
‘More than half of the EU-27′s energy comes from countries outside the EU – and this proportion is rising. Much of this energy comes from Russia, whose disputes with transit countries have threatened to disrupt supplies in recent years – for example, between 6 and 20 January 2009, gas flows from Russia via Ukraine were interrupted.’
The U.S. is in the process of securing its energy future, cutting off its dependence on Middle East energy. It’s in large part thanks to the development of 862 trillion cubic feet of shale gas on U.S. territory.
And that, according to global energy company BP, the U.S. is set to be energy independent and a net exporter of energy by 2030.
That’s great news for the U.S.
But right now, I can’t say the same about Europe.
Of course, ideologically, the U.S. and Europe are different. Despite its move towards statism, the U.S. is far more entrepreneurial and free-market than Europe.
Europeans are still more likely to seek and rely on government involvement than Americans. This means that when national governments or the European Union intervenes, businesses and individuals expect it…most actually look forward to it.
The bottom line is, because bureaucrats are always sticking their noses in, it takes much longer for European nations to get things done.
And because national economies are so influenced by government (run by politicians seeking re-election), politicians are more likely to be influenced by vested interests that are keen to maintain their influence by resisting change (resistance to change is the enemy of entrepreneurialism).
As a report last year in the Economist noted:
‘The old continent [Europe] has nearly as much technically recoverable shale gas (natural gas trapped in shale formations) as America. Europe’s reserves are 639 trillion cubic feet, compared with America’s 862, according to America’s Energy Information Administration, a government agency…
‘Costs are higher in Europe, for several reasons. First, European geology is less favourable: its shale deposits tend to be deeper underground and harder to extract.
‘Second, America has a long history of drilling for oil and gas, which has spawned a huge and competitive oil-services industry bristling with equipment and know-how. Europe has nothing to compare with that. In 2008, at the height of the gas boom in America, 1,600 rigs were in operation. In Europe now there are only 100. America’s more cut-throat market drives costs down. A single gas well in Europe might cost as much as $14m to sink, three-and-a-half times more than an American one, estimates Deutsche Bank.
‘Third, America’s gas industry faces fewer and friendlier regulations than Europe’s. Call it the Dick Cheney effect. And fourth, in America wildcat drillers, if they strike it rich, enjoy access to a spider’s web of existing pipelines, so they can get their gas to market. Europe has no such network nor open-access rules.’
It’s no wonder Europe imports so much of its energy. Government and bureaucracy make it hard and expensive for energy companies to exploit oil and natural gas reserves.
And that makes it hard for innovation to take hold.
But it’s not impossible.
It just means Europe will be pushed much closer to an energy precipice than the U.S.
And that’s where you have the chance to profit as the inevitable happens. Soon, Europe’s flirtation with uneconomical ‘green’ energy such as wind, wave and solar power will end. And so it will have to secure its energy future with the only long-term commercially viable energy source…
Natural gas.
That’s why it’s important for Europe to reassess where it invests its energy dollars. And it’s my belief this will result in a boon for the greenest of the fossil fuels – natural gas.
Yet you may be wondering about the U.S. gas glut that has pushed U.S. gas prices down to record lows. Today, U.S. natural gas is trading at USD$2.38 per million British thermal units (mmBtu).
The price of U.S. natural gas has fallen 55% in the past year. That surely isn’t a good sign for gas explorers. Well, stop right there and take a look at the chart below.
While U.S. natural gas prices have dropped like a stone, European benchmark prices have moved higher. In fact, according to the World Bank, European natural gas prices are 9.4% higher than 12 months ago.
There are three reasons. First, European natural gas prices are benchmarked to the crude oil price. So when crude oil goes up, so does the natural gas price.
Second is the issue of supply. Much of Europe’s gas comes from Russia. And as Europe saw in 2009, Russia isn’t afraid to turn off the taps when it feels like it.
Third, high prices in any market – whether it’s oil, gas or coffee beans – is a signal to investors and entrepreneurs that there’s money to be made due to a shortage of supply.
The increased investment in oil and gas exploration due to high prices should eventually see prices fall… just as we’ve seen in the U.S. natural gas market.
But until then, the signal is clear – Europe needs more natural gas exploration and production.
Kris Sayce
Editor, Australian Small-Cap Investigator
From the Archives…
What Newton Knew About House Prices …That the IMF Should
2012-05-11 – Kris Sayce
Why a Greek Exit From the Eurozone Could Be Great News For Markets
2012-05-10 – John Stepek
Why Europe Will Ditch Green Energy
2012-05-09 – Kris Sayce
Why It’s Time to Buy Gold
2012-05-08 – Dr. Alex Cowie
Why You Should Be Watching Japan’s Economy
2012-04-07 – Dan Denning