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Oil Props Up the Dollar

Unintended, but Good, Consequences

Written by Adam English
Posted January 2, 2013

Oil has been a massive drain on consumers, beyond the obvious sticker shock at the pump...

We've been weakening our economy for decades by shipping dollars overseas while positioning ourselves in a hopeless entanglement of ancient feuds and international disputes.

Ever wonder what the other side of the coin is like?

It must be nice...

International money flooding into the domestic economy, increased investment using the national currency, stability without need for diplomatic or perpetual military action.

Well, hold on for a while longer. Because we're starting to see signs of the negative drag of oil on the U.S. economy finally turning around — and propping us up.

That's right.

The first signs of a role reversal are already in play and will accelerate over the next year.

Weakening OPEC

Stories regarding America's reduced dependence on foreign oil have been circulating for months, and I expect Wealth Daily readers are well aware of what's going on...

As a quick recap, for the first time in 13 years, America is producing over half the oil it consumes. Much of this is due to the massive boom in rigs over shale oil deposits and rising operational efficiency.

Here's a look at growth from the EIA:

eiausoilprod

As you can see, this strong growth trend is projected to continue this year... and beyond.

The increase in production and reduction of foreign dependence will begin weakening OPEC's stranglehold on oil prices — and with it, OPEC's outsized influence on America's domestic energy equation through production quotas.

In 2012 Americans bought 21% of OPEC's oil exports. OPEC countries are set to earn a record $1.05 trillion in net oil export revenues this year, according to the U.S. Energy Department. And as domestic oil production grows through 2013, OPEC countries are expected to see a 5% revenue drop, to $955 billion.

It is still very early in this process, but weakening OPEC revenue is a welcome sign that the oil cartel's ability to pull as much money from American pockets as possible may eventually become a thing of the past.

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Oil and the Dollar

For decades, oil and the dollar have had a negative relationship: Oil prices and domestic demand have sapped the strength of the greenback as cash flows overseas and out of dollar-based assets.

We're now seeing a big change starting here as well.

Reducing outflows for oil strongly affects the current-account deficit, which tracks outflows for trade, good, and services...

The deficit reached a record high of $800.6 billion in 2006. It just reached a two-year low of $107.5 billion in the third quarter.

We aren't just seeing less of a negative effect from oil; we're about to see a positive correlation.

According to Bloomberg economist surveys, the dollar will be (on average) 2% stronger against 46 currencies by the end of 2014. This will be driven by an estimated 14% rise in the price of West Texas Intermediate crude.

Big firms are putting their money behind their own estimates, which are largely in line with the Bloomberg estimate. BlackRock, Inc., Goldman Sachs Group Inc., Citigroup Inc., and UBS are all betting dollar gains from domestic energy production will outweigh the effects of the Federal Reserve's quantitative easing efforts.

BlackRock said of its 2013 investment: “We are bullish on the U.S. dollar due to the country’s energy boom, and long-term growth prospects. The prospect of U.S. energy self-sufficiency could underpin a bullish dollar stance, and a cautious view toward countries dependent on dollar funding.”

The Carrot and Stick

All of this information bodes well for us, even if we do not invest directly in shale oil companies.

It also shows how important the domestic energy boom will be... and how U.S. politicians will increasingly align themselves with oil and natural gas extracting operations.

While politicians can certainly rip it apart through misguided regulation and negligence, there is very little they can do to help the strength of the economy... but just to be sure they have something to take credit for when they're up for reelection, they can and will ensure regulations are aligned to promote growth.

In that sense, reducing the current-account deficit, reducing dependence on volatile and repressive OPEC countries, and bolstering the strength of the dollar in one fell swoop is a no-brainer.

We can expect increasing support from Washington for energy production, as the positive effects of domestic oil and natural gas continue to switch from a drag to a boon for the economy.

We're only in the first chapters of the new American oil boom, and you still have the opportunity to invest in it...

For Your Prosperity,

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Adam English
for Wealth Daily

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