The good old days.
1999 was a pretty good year for me.
Kathleen and I just learned we had our first baby on the way. We found our first house. I got my first truly eye-popping bonus from my job as a professional options trader.
Life was exciting.
I think that’s the kind of moment the U.S.’s broad spectrum energy sector is in right now.
To be clear, I’m not just talking oil. I’m talking the whole panacea of materials that power life in western civilization.
But let’s start there. Oil is the big one at this stage in civilization. It powers, well… seemingly everything. Notably it even powers the machines and vehicles that mine for and transport all the other energy fuels.
The weird thing about energy is that any country has to have if for modern life to exist within its borders. I care about the environment. But I care more about being able to get food to feed my family. So I’m glad trucks deliver it to the grocery store down the street.
What if a country was suddenly cut off from oil?
Well… They’d be f*cked.
But in regard to oil, and other key fuels, I believe the United States wouldn’t face such a scenario.
Thanks to hydraulic fracturing (what the cool kids call fracking) the U.S. is the world’s biggest producer of oil. It’s not quite enough to meet consumption. But being the biggest producer a good stat to own.
Speaking of fracking,
All that prehistoric sea gunk became more than just crude oil. Some of it also turned into a gas. Methane. Natural gas.
Natural gas generates over 40% of the electricity produced in the U.S. And about 80% of it is a byproduct of fracking. Sometimes that’s intentional. And sometimes it’s just a happy accident. And sometimes it’s an inconvenient accident and they have to light it on fire to get rid of it because they don’t have the means of containing it.
We have a LOT of natural gas. It’s an over supply that, with the way things are, creates an imbalance. Just look at this chart.
The huge supply produced in the U.S. smashed prices over the past couple years. America is a net exporter. We make way more than we can use. But, there’s a problem. There’s a whole bunch of red tape nat gas producers need to hack their way through if they want to export it to “non-free trade countries”.
We’re not necessarily talking about Iran and North Korea. Germany, Japan, France, Italy, Spain and other such less unfriendly countries are also on that list. And right now, a lot of Europe REALLY needs an alternative to Russia as a nat gas supplier. It would be nice if the good old U.S. of A. could sell it to them.
Well, it turns out that is one of the apparently less controversial tidbits in Trump’s Big Beautiful Bill. The provision would allow for a streamlined liquid natural gas (LNG) approval process for those non-free trade countries.
Speaking of the good old days, back in the 1960s and 70s, the U.S. was the top producer of rare earth minerals. The Mountain Pass mine on the border of California and Nevada cranked that stuff out. By the early 1990s, China surpassed the U.S. and has dominated ever since.
But… within the last few weeks, the U.S. government made a new commitment to being self reliant on rare earths. They specifically mentioned working in partnership with Mountain Pass. And there are other new mines starting up.
The U.S. is a net exporter of coal. 90% of the coal we use is to generate electricity. We export over 100 million short tons of the black stuff. And the industry is heating up.
The confluence of these three things (fracking, less red tape for nat gas exports, a return to domestic production of rare earth minerals and just mining a lot of coal) sure seems like—from an energy standpoint anyway—America can be an autarkocracy.
Of course, Uranium has been talked about increasingly of late. And the administration also gave some lip service to increasing the use of atomic power. While uranium is not indigenous to America, creating less concentration among the other power sources of one that just needs to be replaced every 4.5 to 6 years seems beneficial to the complex as well.
And here’s where I’m going with this. This Big Beautiful Bill. Yes. It offers an intentional boost for American LNG exporters. But it just may offer an unintentional boost to the energy sector as well. What am I talking about?
Stagflation.
While that’s still kind of a worst-case scenario. It could be closer now than it’s been in a while.
The Congressional Budget Office (CBO) estimates the U.S. government borrowing $3 trillion (including interest) more through 2034. That’s the low end figure. The Committee for a Responsible Federal Budget (CRFB) projects up to $5 trillion if some temporary provisions are made permanent.
Given that massive hemorrhage of cash that will be puked into the American economy, the best case scenario is significantly higher inflation.
What could happen is that cash also reverses the cooling off that the Fed has been working to put in place for the past couple years. The Fed has gotten some criticism lately that they are being too slow to cut rates because the economy has been cooling and is on its way to cooling too much—that’s regular person talk for “recession”.
So if the bill passes similar to it’s current form, you get one of 2 things:
It heats up the economy while causing inflation, or
The economy slips into recession while causing inflation.
That latter one is called stagflation. Sort of like a shit sandwich going BOGO.
But the way to play it is to buy energy stocks. And maybe commodities, utilities and consumer staples. These things tend to be the stuff that rises in price during stagflation. While other stocks may get hammered because of the stag in stagflation, energy and it’s friends bucks the stag. (OK. Weird wording, but…)
Dan Passarelli
Founder and President
Market Taker Mentoring
