The future of the dollar is more likely to be determined in the shale gas and oilfields of Dakota and Texas than in the sovereign wealth funds of Asia and the Middle East. This is because striking new technological developments are set to transform America's energy supplies, significantly improving the US balance of payments and the long-term outlook for the greenback.
The US's current account deficit has been a longstanding drag on the dollar. At the height of the credit boom in 2006, it reached $800bn or 6 per cent of gross domestic product. Though the deficit has halved as the credit crunch has lowered imports, it still stands at 3 per cent of GDP, largely because the US, like the eurozone, Japan, China and India, remains a major energy importer, with annual net foreign oil purchases of $300bn a year. As the US economy slowly recovers, the International Monetary Fund expects the US current account deficit to start rising again. That would lead to foreign central banks accumulating greater reserves of dollars.
But such straight-line forecasts are likely to be challenged as the US's shale gas and "tight oil" reserves are commercially exploited over the next few years. The US has vast reserves of shale gas but, until recently, energy companies were unable to tap the gas trapped in shale rock. Now, through hydraulic fracturing or 'fracking', US reserves of economically available gas supplies have started to rise sharply.
Already the ratio of US gas reserves to annual production has increased from eight years to 12 years. This may not appear substantial when compared to other regions of the world. Qatar, for example, has proven gas reserves well above 100 years of current production. But fracking may allow the US to soon count up to one hundred years of gas reserves relative to current production. That would lead to a major shift in the US's energy outlook.
David Fuller's view I think that Mansoor Mohi-uddin is correct and Fullermoney has repeatedly emphasised the 'game-changing' reality of US gas and oil production in recent years. The US has the world's second largest known reserves of shale gas. Even more importantly, it has the world's largest known reserves of shale oil.
For these reasons, Fullermoney has long projected US energy independence in the next decade and it could easily occur sooner, given favourable energy policies. Ironically, the current White House administration was dismissive of shale reserves, favouring and subsidising what remain comparatively expensive and inefficient green technologies, until it was pointed out what a boon domestic oil and gas industries could be to job creation and the economy.
Moreover, worldwide shale gas and oil reserves are plentiful and for this reason Fullermoney maintains that as more countries utilise US extraction technology, global energy prices will be lower in the next decade in real (inflation adjusted) terms than they are today. Needless to say, this would be good for global GDP growth. Interestingly, China has the world's largest known reserves of shale gas and the second largest known reserves of shale oil.
As for the US dollar, I have been a secular bear for much of my career, but no more on a relative basis to most other currencies, although it will still be fiat money and therefore a poor long-term store of value. The US has huge debt and deficit problems which will take years to resolve but there is now a plausible scenario for America to grow its way out of this hole over the next decade or two. If we consider the US Dollar Index (historic, weekly & daily), which has a 57.6% EUR weighting but also includes GBP, JPY and CAD, the probability is that it is in a type-3 (ranging, time and size) base formation as taught at The Chart Seminar.