USA from Oil importer to exporter

Eight years ago, USA imported 13m b/d (million barrels per day) of crude oil and petroleum products. At the end of 2013, this had fallen to 5m b/d. To put this 8m b/d fall in context, recall that Saudi Arabia currently produces 9.4m b/d. In other words, US imports fell by 90 per cent of the production of the world’s second largest producer. A recent Citi group report estimates that US could produce more than 14m b/d of oil by 2020, with gross crude exports exceeding 4m b/d in a ‘high case’ scenario (see graph). At today’s level, Citi estimates that US could turn an exporter of crude as early as 2018.

The report forecasts that by 2020, US is expected to become larger than the entire Middle East in exporting LPG. In addition, on LNG, the report forecasts that by the end of the decade, US LNG gross exports could amount to 148-Bcm/year (billion cubic meter) which compares with Russia’s 211-Bcm/year (2013 exports) and Qatar’s 106-Bcm/year. Combined with Qatari and Australian LNG, there could be a global glut in LNG by decade end.

Outsized impact
If these figures are achieved, the impact of a 10-Bcf/d (billion cubic feet per day) US LNG export in 2020 could be outsized. While this would be only 10 per cent of the US gas market, it would be closer to 20 per cent of the global LNG market.

US petroleum product balance has shifted from a deficit of 2.5mn b/d in 2005, to a surplus of 2.3 mn b/d in 2014. US refineries benefit from ample crude supply as well as low energy costs due to abundant shale gas. Given insufficient take-away capacity, US crude is increasingly cheaper compared to the ‘water borne’ variety – increasing US refining margins.

The USA remains the largest crude importer in the world with China a close second. With Canadian oil sands production growing the US is its main destination market. This reduces the need for foreign sources. The consequences for other global suppliers – especially the OPEC, are severe. As Saudi, Mexico and Venezuela look for newer markets, prices may remain pressured. This will extend to naphta and LPG – all inputs to the petrochemical sector. Among downstream products, US can remain a large exporter of ethylene derivatives such as PE and PVC, and will reduce its dependence on imports for ammonia.

Winners and losers
With its biggest market becoming a net exporter, the biggest loss in pricing power will be faced by OPEC. This will extend to natural gas as well – currently indexed to crude. The USA could potentially revive as a major manufacturing base for industries using natural gas and gas liquid as feedstock. This would range from energy intensive industries such as fertilizers and petrochemicals to steel, cement and paper manufacturers. The economic impact could last a couple of generations.

In the US, besides the E&P industry, there is likely to be a bonanza of opportunities for ancillary operations – pipeline construction, storage, blending and shipping services. If US exports exceed demand as is currently projected lower prices around the world could revive the use of gas instead of coal in power generation and other sectors where feedstock substitution is possible.

Manufacturers in China, Korea and India would benefit as well.

The biggest losers would be OPEC, and other producer countries with low domestic demand. Fall in prices of petro products would impact US producers as well. The pain levels of US producers is however significantly lower than pain levels of OPEC. Oil prices needed to balance the budgets of producer countries is in the figure below. If Brent were to normalize at $80 per barrel, this translates to a $1trillion boost to consumer economies – a quantitative easing program of the globe!

Indian Impact – positive but

A key cost in manufacturing is cost of energy. In India, with its unreliable power, industries face higher capital costs in setting up alternate generation capacity. In addition, running costs are higher because of the use of high-priced diesel for power. This makes Indian manufacturing expensive.

Reduced cost of energy can provide a significant boost to Indian economy. With better infrastructure and lower capital costs, ‘made in USA’ will likely become a reality once again. However, low and abundant source of energy coupled with lower cost manpower can make India globally competitive bar none.

However, geopolitical shifts are difficult to predict. Will the loss of interest in controlling oil resources in the middle-east mean that the US will be less interested in the politics of the region? Will this result in democracy actually taking root in producer countries without large power interference? Will the need to access the large Indian market make regional oil producers friendlier towards India – for example could there be a partnership between Iran and India which competes with the US? Or will a more powerful China become the market of choice and leave India to struggle with a hostile environment? Only time can tell.

Retirement plans

Investors will soon have many options to invest for their retirement. Several mutual fund houses, such as SBI, Reliance, Axis, DSP BlackRock, among others, are getting ready to launch their retirement products. Only three fund houses – UTI, Franklin Templeton and Tata – currently offer retirement plans in the country. Mutual funds have been clamouring for approval of their retirement products for a long time. They also wanted these products to be included in the Section 80C basket, which allows tax deduction of up to R1.5 lakh on certain investments. Finally, their prayers have been granted. Until recently, only insurance companies were allowed to offer pension products in India.

A cursory look at the offer documents reveal that these schemes offer various investment options to investors. Depending on their risk profiles, investors can choose different combinations of equity and debt. Typically, the most aggressive investment option would have maximum allocation to equity and a very conservative portfolio would have maximum allocation to debt. A combination of debt and equity would take care of the risk profiles that fall between these two extremes.

These various investment options shouldn’t be confusing for a regular mutual fund investor. An investor can figure out the specifications of a plan by looking at the equity or debt component in it. A plan with 65-100 per cent equity allocation is like any equity-oriented fund. Similarly, a plan with 90-95 per cent debt allocation is a pure debt plan. Mutual fund investors may also find investment allocations similar to balance funds, MIPs and so on. All an investor has to do is to pick an investment option that matches his risk profile and investment objective.

Since these schemes are expected to pool savings for retirement, you have the option to lock-in the money till your retirement or redeem it before that. To discourage investors from exiting from the scheme before their retirement, fund houses have lined up stiff exit loads for early redemptions.

Reliance’s product, apart from the two existing retirement funds from UTI and Templeton, qualifies for tax deduction under Section 80C. Other fund houses are also hopeful of getting similar exemption.

However, this is likely to pose a serious challenge to common investors as most of them typically exhaust most of the available limit under Section 80C with their EPF contributions and life insurance policies. ELSS is also going to compete with these retirement products. That could make the choice tricky for most investors.

Also, since some of these schemes do not have a mandatory lock-in period like all other permitted investments under Section 80C, it is entirely up to an investor to stick to his investments. It remains to be seen how many investors will have the discipline and courage to continue with their investment plan in adverse market conditions, as these retirement products allow investors to exit them after paying a slightly higher exit load.