Energy Game Changers?

Russian and Chinese “Presidents” Vladimir Putin and Xi Jinping shake hands last September. Photo by Handout/Getty Images.

Russia signs a $400 billion natural gas contract with China. The EU has enough shale reserves to tell Russia to take a hike. And it turns out the Monterey Shale has about 13.1 billion fewer barrels of recoverable oil than the feds first thought. Yes, it has been a busy week on the Energy front, with lots of news about supply and wheeling and dealing. And lots of speculation about the economic and geopolitical impact. For investors, however, speculation is largely academic—some or all of these developments might impact the Energy industry over the very long term, but markets don’t look that far into the future.

This probably sounds weird considering the media spin on the Russia/China story. Headlines say it’s Russia’s chance to diversify away from its dependence on EU demand for Energy—“pivot” to China, and Vladimir Putin can cut supply to Europe sans economic consequences, giving him leverage in the tussle over Ukraine. Cue European Commission President Jose Manuel Barroso’s impassioned pleas for Russia to go easy on the Ukraine’s overdue gas bill and keep the lights on.

Thing is, there is no causal link between Russia’s deal with China and its ongoing misadventures in Eastern Europe. Putin and his henchmen at Gazprom didn’t just start negotiating with China three months ago, when threats to cut off trans-Ukrainian gas supply kicked into high gear. This deal isn’t meant to be a lifeline. It can’t be! They’ve been negotiating for about a decade, and Russia won’t even start sending China gas until 2018. Even then, Russian news agencies report Russia will ship only 38 billion cubic meters to China per year, 21.8% of the amount shipped to the EU last year. This doesn’t offset or change anything in the here and now. It just means Gazprom gets a new revenue source in a few years, assuming nothing changes.

All the talk about EU shale development is largely the same song, second verse. Yes, there is a heck of a lot of oil and gas underground, and tapping those vast reserves probably would shore up European energy supply for a few decades. But this is just an interesting observation for now—the existence of potential supply doesn’t guarantee production. Not when France has banned hydraulic fracturing (fracking) in shale deposits, Germany and the Netherlands have issued moratoriums on new exploration and Spain’s decentralized government system is stalling progress as national and local authorities battle it out. The UK is trying to kickstart shale with tax breaks and other incentives, but development there is in the early stages. Only Poland is on the verge of commercial shale production, and even there, tax issues have scared off key players. If the Ukraine situation gives leaders the impetus to get past these many hang-ups, and production actually gets off the ground, it probably would be a very long-term economic positive. But not any time soon. Not when fracking is still politically unpopular and the states hold mineral rights, not landowners—politicians are motivated by polls, not profits, and they tend to prefer not alienating voters.

As for the Monterey Shale, at first blush, it probably sounds like terrible news that the Energy Information Administration revised its estimate of recoverable reserves from 13.7 billion barrels to 600 million. The Monterey Shale formation is supposed to hold about two thirds of the US’s shale reserves—the Bakken, Marcellus and Eagle Ford projects were supposed to merely be the opening act for the big California headliner. However, we highly doubt this triggers the return of Peak Oil fears. The EIA didn’t say there is less oil there. Just less recoverable using current technology. The Monterey Shale is just a lot harder to get to than first thought, with oil buried deeper than in the rest of the country due to California’s complex tectonics. At one time, the EIA thought fracking could get to it—now they’ve realized we need new technology.

That technology probably will come—at some point. When? Whenever (and if) oil prices get high enough to incentivize the investment in innovation and technological development, just as rising oil prices in the last decade incentivized the investment in fracking and horizontal drilling that eventually drove the shale boom. Today, with most shale production not terribly profitable—and supply more abundant than ever—firms probably don’t feel a burning desire to plow their spare cash into what is likely a very expensive endeavor. One day, the incentives might be aligned properly—but that day is in the far future.

For investors, the far future doesn’t matter. Stocks usually look about a year or so ahead. Long-term structural issues are interesting, and they can have very long-term economic impacts, but that doesn’t mean much to earnings and economic activity over the 12 to 18 months—most important for stocks. Beyond that, any number of unknowable variables get in the way. What if Russia and China go to war? What if the EU never fracks? What if some other energy source comes along and makes shale yesterday’s news? All worth considering, none worth acting on today.

The same goes for many widely discussed super long-term fears, like demographic changes, Baby Boomer retirement, Social Security blowing up, debt, the economic impact of the Affordable Care Act and all the what-ifs about the Millennial Generation’s eventual economic contributions. No one knows what the far future will bring, good or bad. Forecasts are everywhere, but they’re based on faulty assumptions, past data and don’t even try to account for the unpredictable changes the future will inevitably bring. Exhibit A: In 1999 the CBO predicted 10 years of US budget surpluses. You laugh today—then, many thought it credible. 30 years from now many might chuckle over today’s fears of Baby Boomer bust.

For now, it’s all guessing and speculating—parlor games. Speculating about long-term energy developments and the inner-workings of Vladimir Putin’s brain is fun dinner party conversation (if you’re into that sort of thing), but it shouldn’t have much basis on your investment decisions today.