The unconventional oil & gas industry is a game changer that the US embraces whilst Europe is cold on the ground of environmental concerns

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Why the US economy will substantially outperform the EU for the long run
I do not intend to be comprehensive with tons of indicators which are available: I will only
focus on a few which, in my opinion, are making THE difference.
1. The banking sector
Whilst US banks have largely cleaned up their balance sheet, or more exactly dramatically
reduce their leverage to around 15 x, and have been able to return to markets to fund
themselves at market price (the FED has withdrawn its unconventional liquidity
measures), the European banking system remains under life support from the ECB in the
turn of EUR1 trillion Long-Term Refinancing Operations. The European banking system
has a funding gap of EUR 1.3 billion, and as the WSJ writes “… if European banks were
funded the same way as U.S. banks, they would have a deposit surplus of $3 trillion”.
This is why the US banks are lending t the US economy and European banks do not
finance the EU economy whilst remaining too leveraged at 30 x. To worsen the situation,
banks are increasingly hoarding money with the ECB: USD1.4 trillion as of 9 November.
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2. Lending to the economy
The US commercial and industrial loans from all commercial banks is an indicator I follow
on a regular basis and it proved to be a good early indicator of the US economy
turnaround. Velocity is however part of the money creation and has dramatically fallen
since the beginning of the financial crisis.
Today, I am adding velocity to present a more precise picture. Interesting enough velocity
of MZM1 * commercial & industrial loans by all commercial banks turned up +/- 1 year
ago, adding a bullishness view on the US economy, despite the fact that MZM velocity is at
1.4 x, the lowest since 1959 (when it started to be reported). Banks are financing the
US economy.
1 MZM = M2 less small-denomination time deposits plus institutional money funds. Money Zero Maturity
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3. Energy
One point largely occulted by commentators regarding the US fiscal and trade deficits is
the energy sector. If the US, and everything seem pointing in this direction, becomes self
sufficient within 10 years, this will be huge boost to the trade balance and therefore the
GDP growth.
The oil & gas 2011 trade deficit stood at $993 bn for a GDP 15,321 bn or a negative growth
of 6.5%; if one assumes that thanks to unconventional oil & gas the US can reduce its
energy trade deficit by 50% this would add 3% to GDP: this is a game changer and the
fiscal cliff would be much easier to climb.
The unconventional gas industry will have far reaching effects including job
creation and re-industrialization. According to HIS, “the shale gas production
supported 600,000 jobs in 2010, a number that is projected to grow to nearly 870,000 by
2015”.
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PWC mentions in a 2011 report that by 2025 shale gas will save US manufacturers
USD11.6 billion a year in gas expenses and add 1 million workers.
Hence my positive stance on the US economy.
What will enhance competitiveness of the US industry will have the reverse
effect in Europe which largely ignores shale gas on the ground of ecological
worries. This will represent a competitive disadvantage to Europe not only in term of price
but also independence, since Europe largely relies on non-EU supplies.
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http://www.pcgwm.com/
When enlarging the picture, the map shows that the US competitive advantage goes well
beyond Europe: other countries are paying 3 to 4 times the US price.
Finally, the competition between energy sources had a direct impact on crude oil in the
US. The gap between the Brent and WTI started to widen two years ago to reach a 20%
price advantage today, not petty money.
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http://www.pcgwm.com/
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Source:
Federal Reserve Bank of St Louis: Economic Research
http://research.stlouisfed.org/
Federal Energy Regulatory Commission: Natural Gas Markets
http://www.ferc.gov/market-oversight/mkt-gas/overview.asp
Wall Street Journal: Why Europe’s Banks Trail in Deleveraging Process
http://online.wsj.com/article/SB10001424052702303816504577303582094739676.html
Live Wall Street Journal: European Banks Still Hoarding Money
http://live.wsj.com/video/european-banks-still-hoarding-money/798ED78D-6CA2-
442D-A41B-54FA9CB860A9.html?mod=wsj_article_tboleft#!798ED78D-6CA2-442D-
A41B-54FA9CB860A9
Penn State University: The Economic Impacts of the Pennsylvania Marcellus Shale
Natural Gas Play: An Update
http://www.anga.us/media/41077/penn%20state%20marcellus%20study.pdf
HIS: The Economic and Employment Contributions of hale Gas in the US
http://www.ihs.com/images/Shale_Gas_Economic_Impact_mar2012.pdf
PWC: Shale Gs – A renaissance in US manufacturing?
http://www.pwc.com/en_US/us/industrial-products/assets/pwc-shale-gas-us-
manufacturing-renaissance.pdf
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