The Return of a Strong Dollar

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Friday, 16 November 2012, 7.55 am, and Saturday, 17 November 8.35 am)

In the 1990s, major US oil companies believed that there was no more oil left to tap under American soil. But a middle-aged American geologist by the name of Richard Findley thought otherwise.

He calculated that large amounts of oil were still trapped in the adjacent shale rock, especially in the old oil fields of the Bakken formation in Montana.

Quietly, he bought over the drilling rights on the cheap. Unfortunately, Richard had no money to conduct any drilling. He and a new partner also realized that conventional drilling methods could not extract oil out of the shale rock.

They eventually tied up with Halliburton Co, the big Houston oil-services company. This was critical because Halliburton had a new drilling technique called “horizontal drilling”.

Basically, instead of drilling vertically into the ground, “horizontal drilling” uses computers to drill vertically deep down and then horizontally. When combined with a process called hydraulic fracturing, the drilling becomes commercially viable as long as oil is above $50 a barrel.

In May 2000, Richard’s calculation was proven right when the new drilling technique struck oil. More importantly, the oil discovery triggered a shale oil and gas boom across America.

Today, 12 years later, the new drilling techniques have unlocked huge hydrocarbon resources previously thought unrecoverable. It has been estimated that America’s reserves of shale oil are five times that of Saudi Arabia’s conventional oil.

Twenty years ago, the US imported 60% of its oil. This is about to change. The International Energy Agency has just reported that the current US shale oil boom would make America the largest oil and gas producer by year 2017. Not only that, the US would be self-sufficient in energy by year 2035.

There are actually large shale oil deposits all over the world. But current techniques and rules make their exploitation almost impossible.

So this shale oil and gas revolution will just boost the US economy for the time being. With US energy prices expected to remain more than 60% cheaper than its European and Asian rivals, US industries are enjoying a big cost advantage.

In the 18th century Industrial Revolution, Britain was the global engine of growth. One of the reasons was its abundance of cheap coal. From the late 20th century, China became the global engine of growth. One of the reasons was its abundance of cheap labour.

It is possible that the US economy would soon regain its role as the global engine of growth, this time based on cheap energy. It would mean the return of a strong US dollar.

Two factors will help make this happen. Firstly, with the US economy rebounding, US interest rates would rise sooner than expected. Secondly, the persistent US current account deficit would reverse as US exports rise and oil imports fall.

If the current weak dollar can be traced to Ben Bernanke, then the forthcoming strength of the dollar can be traced to Richard Findley. Today he is living a very comfortable life and running a profitable business.

But before his big break came along, it was a constant struggle for Richard. In an interview made years ago, Richard revealed that money was always tight. He and his wife were tempted to give it all up many times and do something else.

But after many discussions at the kitchen table, they realized that Geology was the only thing Richard knew, and the only thing that Richard ever loved. So they refused to give up until they struck black gold.