Challenges faced by the United States energy investment sector

Many people across the United States invest money in the real estate sector and they do not show enough interest towards investments in energy. Merrill Lynch analyst Francisco Blanch recently articulated that the main reason for the current economic crisis in the United States is related to this. Further, he mentioned that the primary function of financial markets in the global economy is to channel savings and capital towards the most productive investments in the real economy. Merrill Lynch added that the function of the energy sector is to increase the energy supply, which would support overall economic growth. But from recent records, we find that energy investments, such as oil, over the past few years have not kept pace with the economy. Oil production across the United States has reduced significantly due to the lack of energy investments.

Many analysts pointed out that the price of natural gas in Europe is currently less than half that found in the United States, due to the significant quantity of energy investments which have enabled a significant expansion of supply in North America. The analyst from Merrill Lynch, ironically, said that the emerging markets like China had increased their savings rate, while industrialized countries like the United States were living on credit. The excess saving method followed by the Asian countries have attracted the Anglo-Saxon real estate giant to invest in those markets instead.

The underdevelopment of capital markets in emerging countries and the closure of the energy market have transformed the savings market with fixed incomes as the most liquid debt market. This transformation has enabled financial institutions across the United States to boost their assets and allowed the American financial system to have among the highest debt ratios in the world.

Initially, this savings was invested in the construction and real estate sector in the United States, prior to overflowing to other countries like the United Kingdom. Due to this, the United States, Europe and even some emerging countries now have a surplus and as a result, real estate prices are falling rapidly.

The energy investment sector soon began to thrive, with the marginal cost of oil production and exploration rising continuously.  Moreover, the analyst stated that 70 percent of new deposits were made for offshore oil production and exploration projects. The availability of skilled manpower, raw materials and equipment has increased the costs of extraction, and at the same time, the deposits were exhausted in business at a faster pace. To master these hurdles, the industry and government should provide for a greater number of investments in energy to be allocated for new oil and gas projects.

- Chris Termeer

Chris Termeer

Chris Termeer is an oil and gas consultant, industry commentator and analyst. His book, Fundamentals of Investing in Oil and Gas provides a comprehensive overview of all aspects of the oil and gas industry, including exploration, drilling, production, storage, transportation and refining, to name but a few.

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