Will There ~~By~~ 📝Be Another Energy War?
Welcome to the Real Estate ~~Ispecial~~ 📝Espresso Podcast, your morning shot of what’s new in the world of real estate investing. I’m your host, Victor Menasce. On today’s show, we’re going to take a historic look at a few major shifts in the global monetary system.
But first, have you finalized your tax strategies for 2025? There’s still time this year to take advantage of bonus depreciation, which can result in a huge tax advantage for the savvy investor. ~~That’s~~ 📝Tap the link in the show notes to watch our webinar recording to get more info on our recent opportunities in Bradenton, Florida. Send an email to info at ~~ystcapital.com~~ 📝ystreetcapital.com and put the word Bradenton in the subject.
On today’s show, we’re looking at what happens during major shifts in the global trading system. You might try to understand what happens when ~~your~~ 📝new political forces take hold – specifically around world reserve currencies. These shifts have occurred a few times in the past century.
In the wake of the First World War, the British pound was trying very hard to get back to the gold standard. The world was not confident in 1928. The seeds for the Great Depression were already sown, and investors had started to shift their emphasis. I’ll come back to that later.
Second time was in 1971. Nixon had closed the gold window and dropped the link between the U.S. dollar and gold. That was effectively the end of the Bretton Woods system that had been established in the wake of World War II.
So fast-forward to today. It’s no question the U.S. dollar is still the preferred means of exchange between nations, but there are some distinct circumstances when the U.S. dollar is simply unavailable as a means of exchange.
When Russia invaded Ukraine, ~~russian~~ 📝Russian assets in foreign banks were frozen. Russian banks were frozen out of the SWIFT network for inter-bank transfers. The message was clear. You can continue to use the U.S. dollar as long as you conduct yourself in a manner that agrees with the U.S. government.
The U.S. cannot have it both ways. You can’t say on the one hand the U.S. dollar is going to be the universal means of exchange within the global monetary system and, at the same time, we’re going to punish you by using the dollar as a weapon against you if you don’t comply with our wishes.
I’m not here to debate the merits of whether those assets should or should not have been frozen; I’m just saying this is what happened. So if you’re an investor in the U.S., why do you care? Why does this matter to you? What will happen as a result?
Now, let’s be clear: the U.S. dollar is not about to fade into oblivion any time soon. There’s simply too much dollar-denominated debt in the world, and there’s more U.S. dollar transactions outside the U.S. that are not actually Federal Reserve–minted dollars than U.S. dollars in the U.S.
Over the last two decades, the ~~southern~~ 📝sovereign economies have devalued their currencies to create a more competitive structure for their exports. And guess what: there is a global trade war underway, in case you haven’t noticed. That means that globalization has ~~given a way~~ 📝given way to renewed economic rivalry amongst nations.
At the moment, it appears to be the U.S. against the rest of the world. Even U.S. allies have been turned into economic rivals. The game of win-win has become a game of win-lose and, in some cases, lose-lose.
Now, on today’s show, I want to draw your attention to a couple of shifts that are not making headlines, that I think you should be aware of. The first is that the U.S. is no longer a growing energy power. The U.S. ~~Shell~~ 📝Shale Revolution has been the only substantial growth of oil production in the world in the last 15 years.
The U.S. hit peak oil in 1970 with conventional oil, and again this year in 20~~25~~ 📝24 in terms of shale oil. It was not long after 1970 that the OPEC nations allied themselves against the U.S. We have another unstable situation in the Middle East, and in the U.S. all of the most productive oil fields have already been developed and, from here on in, the yield for each new well is going to be lower and it’s going to require more investment to get the same amount of oil.
Remember, these shale wells produce the greatest output the day they start producing, and after a year production declines by 85 percent. So you have to keep drilling new wells just to keep up with that 85 percent annual decline curve. These wells need high prices just to break even.
The U.S. is increasingly becoming energy-dependent on other countries again, which will change the global dynamics. The problem is based on the geology, and no policy in any legislative body or the White House or any corporate boardroom is going to change the output of an oil well. It’s based on geology.
The U.S. demand for energy is continuing to grow. The growth in electricity generation is going to come from one thing only in the short term, and that’s natural gas. Even a nuclear renaissance in the U.S. will take at least a decade before it adds realistic capacity.
Natural gas has become a national security issue in Europe, and I predict it’ll become that eventually in the U.S. as well. Oil has become the most hated commodity on the planet in the last few years, which has driven major declines in investment.
Today the energy sector amounts to about 2.3 percent of the stock market value in terms of the Dow. The historic average has been about 12 percent, and it’s been as high as 30 in some years.
The U.S. is not energy self-sufficient; it is not now and it never really has been at any time in the last 75 years. Yes, there’s been a few years starting in 2019 where the U.S. became a net exporter of energy, but that’s changing again. The U.S. is still importing a lot of oil in order to balance its refineries.
Countries around the world are watching the capricious behavior of the White House when it comes to trade negotiations. In fact, the U.S. this past weekend abruptly halted trade negotiations with Canada.
If Canada can’t get a deal done with Trump, then imagine if you’re Cambodia or Brazil or Argentina. They can’t pin their fortunes on the U.S. shining favorably upon them because that could change in a minute.
Energy has been weaponized against the U.S. in the past and it could happen again, and could become a pawn in that great game of economic warfare.
As you think about that, have an awesome rest of your day. Go make some great things happen and we’ll talk to you again tomorrow.
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