Around this time last year, we were observing the reaction of the Middle East, most notably Saudi Arabia, to shale. The big issue was exactly what OPEC would endorse in terms of production. We seem to be past that now, and the old lines about the Stone Age ending when they ran out of stones did not apply here. Today, we believe Saudi Arabia is being fairly intelligent in managing its asset base.
From our perspective, the most important and enduring issue in energy is the impact of technology. We believe energy may have moved from being an extractive industry to a technology-driven industry. To illustrate, the charts below shows when fracking technology came in to play, and the immediate price reaction. As well costs have declined, so too have oil prices.
How much is that going to change moving forward into 2016? Is $30 per barrel the right number? We just don’t know. What we do know, from a technology perspective, is that Moore’s Law leads to lower marginal costs supporting low prices. As an extractive industry, oil has a naturally increasing marginal cost curve. These two forces are in clear conflict right now, but with WTI at $38 per barrel (as of 3/29/16), it appears that technology is winning the argument.
GICS Reclassification: Impact on Emerging Market Investors
