Natural Gas, Fueling an Economic Revolution
No one could have predicted that oil prices would rise to todays levels. Saudi Arabias oil minister, Ali al-Naimi, says that they are irrationally high, pointing out that world demand is lower than the available supply and that Saudi oil inventories around the world are largely untapped. The "irrational" cause, of course, is fear of a war with Iran. But it would also have been unpredictable that a 47 percent hike in oil prices since November 2010 would not cause a major slowdown in the U.S. economy. One reason it hasnt might well be the rise of shale gas.
By now, the basic facts are well known. It was only a few years ago that most experts were warning of an imminent shortage of natural gas in the United States. But thanks to the efforts of a small private company, Mitchell Energy, combined with a horizontal drilling procedure called hydraulic fracking, it has become possible to extract vast quantities of natural gas from shale, which this country has in abundance.
As with so many stories of American ingenuity, Mitchell Energy had a little help. In the 1970s, the federal government initiated the Eastern Gas Shales Project and funded dozens of hydro-fracking demonstration projects. The Energy Department pioneered a technique known as massive hydraulic fracturing, a key step along the way. It subsidized Mitchell Energys first successful horizontal drilling in the North Texas Barnett Shale region in 1991. Between 1978 and 1992, the federal government spent $137 million to develop these technologies.
Whoever gets the credit, the effects are widespread. The United States now has, at current consumption rates, at least 75 years' worth of recoverable natural gas. More important, the United States has become the worlds low-cost producer of natural gas. That fact is already changing the future of U.S. manufacturing. Companies such as Dow Chemical and Westlake Chemical are finding that low U.S. energy costs can mitigate the lower cost of labor in Asia -- making it economical to keep and even build manufacturing facilities in the United States.
That might also help explain why high oil prices are not slowing down the U.S. economy as much as has been feared. Robert Hefner, a natural gas entrepreneur and author of "The Grand Energy Transition," points out that the cost of heating 65 million American homes by natural gas has fallen $20 billion annually.
The environmental concerns are well taken. But the best studies out now -- such as one by a committee that included the head of the Environmental Defense Fund -- suggest that fracking can be done in a safe and responsible manner. Many of the riskiest practices are employed by a small number of the lowest-cost producers, a situation that calls for sensible regulation. Larger companies would probably welcome a set of rules, because they would want to follow best practices to protect their reputation and brand.
The age of natural gas will have geopolitical consequences. Until now, oil has been traded on a global market, but natural gas has been local. Because it is difficult to transport gas, countries with abundant resources and good pipelines get to set the price. Russia is able to demand up to $17 per thousand cubic feet from neighbors such as Ukraine and nations in Europe. The United States can produce natural gas for $2.50 per thousand cubic feet, and it has the world's best and cheapest liquefying technology. Liquefied natural gas will create a single global market, and when long-term Russian contracts with Europe expire, Moscow will face a dramatic shortfall in revenue. We will move from a world in which a few countries -- Russia, Iran, Qatar, Saudi Arabia -- control the price and supply of natural gas to one in which this energy source is far more dispersed. (For now, Iran has access to none of the technology needed to capitalize on its resources.)
Oil is famously found in difficult, dysfunctional places -- and oil may be the cause of those problems. The new finds of shale gas are not in traditional resource states. The largest deposits appear to be in China, with sizable ones also in Argentina, Mexico, Poland, Canada and Australia. The geopolitical ramifications of these deposits are many, but some things are clear: It will be a blessing for Poland to have its own secure energy source and not have to depend on the vagaries of the Kremlin.
The rise of shale gas is shaping up to be the biggest shift in energy in generations. And its consequences -- economic and political -- are profoundly beneficial to the United States.