After the first 10%+ correction since the 2009 debacle in all the major stock market averages during the third quarter of 2014, the fourth quarter of 2014 witnessed the major stock market averages recovering to make new highs and finish another year of positive returns. We can only hope this will put to rest the insistence of the many naysayers who have argued that the economy, and therefore the market, were on the brink of collapse. We have long argued the folly of that thinking and will simply suggest that maybe it is time for the punditry to find a new mantra.
It may have found one in the energy markets, specifically the price of crude oil. The same punditry that insisted that oil would certainly hold $100 per barrel and likely was on its way to $120, are betwixt and between over the fact that the price of a barrel of crude has been cut in half over the last six months. While the conventional wisdom (of negativity) is finding every possible reason why the drop in the price of oil is sure to result in doom, we would like to suggest an entirely different phenomenon that has materialized. It is our belief that the most important aspect of the precipitous drop in the price of oil is that oil prices now dictate events in the Middle East as opposed to events in the Middle East dictating oil prices! That’s right, the regimes that have so smugly, and deliberately tried (and often succeeded) in using their oligopolistic control over oil production, and therefore prices, to exact their way with the world economy are now caught in the reality of what we will call the “western miracle of energy independence”.
The countries that have rested on the laurels of energy dominance for decades, and played many a western country for fools are seeing the “sands shift below their feet”. They have supported the status quo of despotism and central control while looking the other way (and largely funding) the radical extremism that has caused so much death and destruction in the Middle East and all over the world, meanwhile lining their pockets as the few who benefitted handsomely from energy riches. Thanks to the marvel of western technology and know-how, hydraulic fracturing (fracking) and horizontal drilling as well as technologies that make finding oil much more cost effective, have in a very short period of time turned those regimes upside down! Essentially, American ingenuity has won, again. It has put America and the west on a trajectory to energy independence that has reshaped the world energy markets.
The benefits of this cannot be overstated. As most of us who have been around long enough to have witnessed the rationing of gas in the 1970s know, Americans have been lamenting the “barrel” we were over with respect to our dependence on foreign (Middle Eastern) oil for decades. Much was risked and lost in the form of life and treasure in trying to ensure that our “friends” who supplied us these commodities were ever able to do so. The lack of dependence on these sources reshapes entirely the geopolitical landscape in the Middle East and other places such as Venezuela, and Russia as well. Tiny Israel, in which we have very significant invested interests, has also “moved on”, and is on its way to energy independence.
For sure, the disruption that this is causing in the Middle East is troublesome for those who must endure the “implosion” of the former status quo. We empathize greatly with those that are facing the upheaval inherent in the terror of movements like ISIS, Hamas and Hezbollah. We can only hope that somehow, the people of those countries embroiled in the mayhem that has been sewn by decades of mismanagement can somehow find their way to reform. However, the benefits to the broader world of no longer having to rely on the unsavory characters who used to “control” world energy markets for the necessary fuel to finance an amazingly innovative period in world history is of extraordinary benefit. This will have ramifications that are beyond the scope of most observers. Stay tuned.