There's A Huge Bullish Story On Energy And The Economy And It's Sitting Right Below The Radar

Economists have recently been scrambling to crank up there U.S. GDP growth forecasts.

“What’s going on here?” asked Potomac Research Group’s Greg Valliere. “In a word, it’s energy.”

In a note today, Valliere called this a huge story that’s below most people’s radar.

As Bloomberg’s Bob Ivry said this morning about the Great American Shale Boom: “Nobody Expected U.S. Oil Boom to Be This Boomy.”

It’s basically true — there have been lots of doubters who’ve argued it was all just a flash in the pan.

But energy has been an amazing growth story in the U.S. for the past few years. And continues to be so today.

Now, economist Ed Yardeni believes a “fracking dividend,” much like the “peace dividend” that followed World War II, is about to take hold and lift the U.S. economy. He writes:

The Fracking Dividend has already narrowed this US petroleum trade deficit from a recent peak of $US359 billion (saar) during January 2012 to $US182 billion during November 2013. The deficit could go to zero over the next couple of years. That would provide a big dividend to real GDP growth, as well as more purchasing power for Americans. Building the infrastructure to export crude oil would be another benefit, especially for capital goods manufacturers.

On Wednesday, we learned oil had helped cut the U.S. trade deficit to a four-year low. Petroleum product exports climbed to an all-time high of $US13.3 billion. Meanwhile, crude imports declined to $US28.5 billion, the lowest since November 2010. The petroleum deficit thus shrank to $US15.2 billion in November, the lowest since May 2009.

This chart from Yardeni documents these phenomena. The units are in barrels, not dollars, and thus shows an even greater magnitude:

Those gains are all because domestic production continues to boom. Oil output is at 25-year highs:

Natgas production is at all-time highs:

And the EIA now projects the boom will remain mostly steady into 2020 for oil and well beyond for natural gas.

Oil and gas firms are now making a strong push to allow for raw crude exports, which have been banned since the ’70s oil crisis. Reuters saysthey’re not facing much opposition, andsome analyststhink it could help lower gas prices in the long term by releasing more supply onto the market, though it would likely raise prices in the short term.

Even if that were that to occur, they’d merely be rising back to levels we’ve seen before — not to new highs. That’s because gas prices have been drifting lower for the past few years, leading to an outcome we’ve called “plateau oil.”

Deutsche Bank’s Joe LaVorgna has said every $US0.01 change in gasoline prices is worth $US1 billion in the economy. Prices have declined more than $US0.50 since 2011 highs. Chart:

Most importantly, the boom has created jobs. Although the overall numbers remain modest, payrolls in the oil and gas sector have grown faster than most other parts of the economy. Here’s a chart from Bloomberg economics editor Vince Golle chronicling the trend:

We have to mention that there remain concerns about the environmental effects of fracking. Evidence continues to mount that activity associated with fracking has caused earthquakes in Oklahoma to spike, and an AP report showed the number of water quality complaints in areas with fracking activity has surged, although not all of these can be linked directly to fracking, which involves sending hundreds of thousands of gallons of water and chemicals into the ground to free up resources.

But we’ll give the last word to Potomac’s Valliere, who agrees with Yardeni’s sentiment that energy will tip the U.S. into overdrive. In a note this morning he writes:

With Washington staying out of the way (no crises, no major new fiscal headwinds), when was the last time we could say this: the risks on the economy are upside risks. This is a major reason why Fed tapering will continue — and it’s still another reason why the budget could get close to a surplus within two years.

A long time indeed.

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