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Risk, Reward and Energy Independence

Sigma Investment Counselors

October 22, 2012

It is becoming increasingly clear that the US is becoming less dependent on foreign energy. On a 12-month rolling average, domestic output hit 6.1 million barrels a day in July, up roughly 19% in three years. In 2005, the US imported 60% of its oil. That’s now down to about 42%. Increases in domestic energy production have been a rancorous topic in the recent presidential debates, but the disputes have centered around the whys, not the fact that US output is up.

The rewards part of domestic energy production, and for that matter other resource development, are, I believe, self-evident. Australia, for example, has been enjoying a widespread economic boom, due in large measure to increased mining activity. Norway has become a wealthy country, and a very nice place to live, even though it tends to be cold and dark for too much of the year, primarily due to the flow of oil from the North Sea.

Oil and gas production provides for widespread improvements to the economy through royalty payments to property owners, significant increases in well-paying jobs for exploration, production, transportation and infrastructure. Investors, individuals, pension funds and mutual funds, also benefit as energy companies increase their earnings and dividends. Moreover, upticks in energy related employment and earnings can be expected to translate into increased consumer spending with benefits across the economy.

Unfortunately, energy production, like most human endeavors, entails risks, not only to the individuals directly involved but, potentially to all of us to the extent that the environment may be degraded. Enlightened regulation is clearly a must. The issue is, in my opinion, should regulation be directed towards finding acceptable solutions or should regulation be used as a mechanism for saying no.

Assuming continued development of domestic energy, it is quite possible that the US will not only become energy self-sufficient, but also become a net exporter over the next decade. The potential increase in national wealth would be substantial and could support a long-term improvement in corporate earnings and higher stock prices.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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