Fisher Investments Editorial Staff
US Economy, Emerging Markets

Energy in the Spotlight

By, 03/05/2013

Myanmar is just one nation that stands to benefit from recent market-oriented energy reforms. Photo by Paula Bronstein/Getty Images.

Energy markets seem poised to get a bit more efficient, thanks to several market-friendly changes in the works globally.

In the US, the State Department released the updated environmental impact report (EIR) for the long-awaited Keystone XL pipeline last Friday, deeming the project’s environmental costs manageable. This should give President Obama political cover to greenlight the pipeline’s northern half, clearing the way for construction. Once built, Keystone XL should improve US energy infrastructure, likely reducing some of the high costs resulting from supply bottlenecks. For example, oil from Canadian tar sands won’t have to travel to Gulf Coast refineries by barge, truck or rail—slow, costly and more accident-prone means of transport. US projects including oil from the Bakken shale would similarly benefit. The project isn’t a panacea for US energy markets’ various inefficiencies (e.g., California’s wonky restrictions), but it should bring much-needed help.

Meanwhile, Mexico’s new President Enrique Peña Nieto convinced his Institutional Revolutionary Party to drop its longstanding opposition to ending state-owned Pemex’s oil monopoly. Legislation’s still pending, and it’s unclear whether privatization is in the cards, but Peña Nieto’s campaign pledges included opening the industry to foreign investment and opening some reserves to private firms—welcome changes. Mexico has one of Emerging Markets’ most inefficient energy supply chains: Most home heating, hot water and cooking systems run on propane, which Pemex trucks around the country. When foreign and private providers enter the market, they’ll likely bring more advanced technology with them, upgrading infrastructure and helping power be cheaper and cleaner—something all Mexicans should benefit from.

Myanmar, too, is trying to reap the benefits of foreign investment: The government plans to auction at least 20 offshore oil and gas exploration contracts this spring. Officials believe letting foreign companies develop these resources will help ease the country’s significant domestic natural gas shortfall. Myanmar actually produces more than enough gas to meet demand. But the former military dictatorship signed contracts to export most of it—its primary economic lifeline under Western sanctions. As a result, biomass (mostly wood-burning) powers most of the country. The government could renegotiate these contracts, but officials fear this would make coveted foreign investors skittish—investors tend to be more confident when contracts are iron-clad. So they’re opening up the market instead—a sensible decision that should help foster Myanmar’s continued rapid emergence.  

Finally, Germany seems to be following the UK’s lead and rethinking its opposition to hydraulic fracturing, or “fracking.” Recall, when Chancellor Angela Merkel decided to shutter Germany’s nuclear power plants by 2022 (a kneejerk reaction to 2011’s Fukushima Daiichi nuclear disaster), she planned on renewables filling the shortfall. But shifting toward solar and wind power hasn’t gone so smoothly—production’s short of estimates and massive subsidies have caused energy costs to soar. With lower energy costs key to Germany’s continued manufacturing prowess, the administration’s desperate for a solution. Thus, it’s proposed allowing fracking in certain areas—sites near water supplies and in national parks and conservation areas would be off limits, but all others would be fair game (contingent on EIRs). This should clear the way for pilot projects, which aim to show fracking-wary citizens the technique’s largely safe while assessing the size and potential economic impact of Germany’s shale reserves. Industry experts believe there could be 50 years’ worth of supply, which could power the country while it waits for renewables to become more economical—likely providing energy bills a measure of relief in the process.

These are just some of the changes afoot—New Zealand, the Ukraine and Turkmenistan have also listed state-owned energy assets for sale in recent weeks. Individually, these are incremental changes, but together they’re a notable shift for an industry that’s grappled with meddlesome governments recently. Moreover, they should make energy markets more competitive, helping supply move more efficiently and lowering costs for businesses and consumers—perhaps setting examples for the rest of the world.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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