Decimal Digest
26 Mar 2012

Over last two years, even as the financial markets across the world have tried to come to terms with the debt overload in most of the large economies, one little corner of global economy is changing the future dynamics for the world.

The success of technological innovation in gas extraction, by a recently perfected technique, colloquially called „fracking‟, has created an abundance of natural gas in the continental North America. Ratio of Crude Oil to Natural Gas prices is at historical high in North America. Also, the differential in Natural Gas prices in Asia & Europe on one hand and North America on the other hand is at historical high.

Natural Gas abundance can change global economic outlook in many ways, over next few decades, as described below:

• Decreasing importance of Middle East in global energy supply chain. This process can become meaningful by end of this decade as Canadian gas starts reaching Japan, and at the same time Chinese gas production starts increasing rapidly.
• Net energy imports by North America can fall to negligible levels in next few years.
• Energy cost advantages, coupled with technological advantages, can lead to re-industrialization of America, over a period of time as supply chains shift globally.
• Most importantly, the relatively low energy costs in USA will enable FED to continue with ZIRP for longer time than otherwise would have been feasible, helping a stronger resolution of the housing overstocking problem.

It is possible, if the forecasts of the US NatGas industry come true, the US economic growth for next decade or so can significantly surprise on the upside. On the flip side, these developments indicates a lower need for US to rely on cheap manufacturing labor from developing world, making the structural adjustment in Chinese economy a more urgent matter. Also, many export dependent developing countries will grow more slowly in future than in the past, for the same level of global economic activity.

Asset managers, with portfolios designed to benefit from this trend reversal, should do well going forward.