In a World of Fear, One Commodity Remains on Top

What Happened?

The Biden administration last week committed the U.S. to supporting a global $300 billion annual payment to developing countries to help them fight ‘climate change’.

That’s an increase from the previous $100 billion per year commitment.

But the developing countries wanted $1 trillion per year.

Others pitched $500 billion.

The Biden administration figures that when President Trump takes office in January, the whole deal will be dumped anyway…

But they hope the ‘lower’ number at least gives them a chance.

Meanwhile, despite the current administration’s green focus, one industry has become the most productive in the U.S.

That industry? Oil…

Why it Matters

As Bloomberg News reports:

‘Oil and gas extraction has seen the fastest labor productivity gains of any sector in the past decade.’

It’s due to innovations in the domestic oil and gas industry.

Hydraulic fracturing (‘fracking’) has been part of the oil industry for 30 years or more. It allowed drillers to extract oil from previously hard-to-exploit wells.

But it’s not just fracking. ‘U-turn’ wells have become as much a part of the innovation. That involves the drilling companies doing exactly as the term suggests — instead of drilling down and then going in a single horizontal direction, the ‘U-turn’ involves driving the drill bits around a bend to effectively double-back.

Why does that create more productivity? Because instead of drilling two parallel wells, they can drill one which covers the same area. That creates greater efficiency, requiring fewer staff to monitor a well that’s producing the same output.

Of course, all this innovation in the North American oil industry is also partly due to the ongoing high oil price. At a higher price, drillers can access previously uneconomic resources.

And with macroeconomic and geopolitical events in the headlines, it’s unlikely oil prices will fall much from here in the short-term. But what about the longer term?

How it Affects You

Banking and research firms, J.P. Morgan [JPM] and Goldman Sachs [GS] both see limited gains for oil next year. J.P. Morgan has an average target price of $73 per barrel, while Goldman Sachs forecasts $76 per barrel.

The big unknown right now is what will happen when Donald Trump takes over as president on January 20^th . It’s well documented that when he became president for the first time, some leaders of ‘troublesome’ countries were scared Trump may ‘strike first’ militarily.

It didn’t turn out that way. And through the recent election, Trump made a big deal about there were no new wars during his first administration, and he planned it to be that way this time too.

So, arguably, Trump is more of a known quantity this time. Will that embolden those looking for trouble? So far, it doesn’t seem that way. As Newsweek reported last week:

‘Russian President Vladimir Putin has indicated he is open to negotiating a ceasefire in Ukraine with incoming U.S. President Donald Trump but remains firm on critical conditions.’

We’ll see come January 20^th . The next two months will be critical for a number of reasons: politically, militarily, and economically. But despite the fear out there right now, even these small concessions should be seen as a positive.

That doesn’t mean geopolitical tensions will go away. But even if the tensions fall, it’s more likely than not that oil, the oil price, and the oil industry will continue to be the center of attention.