UPDATE (August 2, 2013): The Energy Information Administration yesterday reported that, largely because of new shale discoveries, U.S. proved crude oil reserves increased 15 percent in 2011. This represents the second consecutive year of record increases, and brings U.S. proved oil reserves to their highest level since 1985. EIA also found that U.S. proved reserves of natural gas jumped 10 percent in 2011, the second-largest annual increase since 1977.
The future is not what it used to be due to George P. Mitchell, the Texas wildcatter who passed away last week.* He helped usher in a new era of American dynamism by perfecting the hydraulic fracturing techniques (“fracking”) that have unlocked vast gas and oil deposits previously thought inaccessible within tightly-packed shale rock beds that underlie large sections of the United States. As well-known energy Daniel Yergin puts it, “George Mitchell, more than anyone else, is responsible for the most important energy innovation of the 21st century.”
Along the way, he played a major role in demolishing two humongous chunks of the conventional wisdom that consigned America to a reduced position in the world. The first notion, which gained full force during the oil shocks of the 1970s, was that the future would be defined by ever-increasing energy scarcity. In May 2008, no less a personage than President George W. Bush, a former oil man, warned that “the supply of oil is limited,” and in December 2009 the International Energy Agency’s chief economist predicted that “peak oil” – the much-theorized moment when the global supply of oil ceases to grow – would arrive in 2020.
But the shale energy revolution sparked by Mr. Mitchell has turned these ideas on their head. U.S. crude oil production in 2012 posted its largest yearly increase in history, a development that helped propel the country pass Saudi Arabia as the world’s biggest fuel producer. The IEA now forecasts that the U.S. will overtake Russia as the world’s largest producer of natural gas by 2015 and come to rival Saudi Arabia in oil output by the end of the decade. BP reports that the United States will be essentially self-sufficient in energy by 2030, and both Citigroup and Exxon Mobil expect the U.S. to become a net energy exporter in the coming decade. A new study released by Harvard University foresees that U.S. shale oil output could surge from about 1.5 million barrels a day at the end of 2012 to about 5 million barrels a day in 2017, in the process likely making the United States the world’s top oil producer. And another report finds that the domestic production of relatively cheap natural gas will accelerate over the next three decades and decline only slowly after that.
President Obama highlighted the meteoric turnabout in America’s energy fortunes in this year’s State of the Union address, noting that “After years of talking about it, we’re finally poised to control our own energy future.” This theme also was prominent (examples here and here) in his speaking tour about economic policy last week. Saudi elites are starting to fret that rising U.S. production might undermine the kingdom’s economy. And instead of scarcity and stark resource limits, the new intellectual debate is about whether the shale boom is so much of a good thing that we should worrying about the specter of “resource curses” and the “Dutch disease” (examples here, here and here).
The second notion that Mitchell had a hand in dismantling is that China is on the verge of eating America’s strategic lunch. This contention emerged with vengeance when China racked up a 14-percent growth rate in 2007 while the U.S. was sliding toward financial meltdown.** An outpouring of prophesying quickly appeared about how China was set to rule the world, how the West was being lost and how America risked becoming Beijing’s bitch. The German finance minister declared in September 2008 that the United States was losing “its status as the superpower of the global financial system.” And even Secretary of State Hillary Rodman Clinton seemed resigned to having the strategic tables turned, musing in March 2009 about “How do you deal toughly with your banker?” An echo of this sentiment shows up in the new Pew Research Center global survey of public opinion, which reports that many throughout the world believe that China either has or is in the process of surpassing the United States in the global power sweepstakes.
But the prospect of Chinese global dominance that seemed so inevitable just a short time ago is now anything but. China’s dramatic economic slowdown in recent months has certainly tarnished that idea, with New York Times columnist Paul Krugman commenting the other week that “The country’s whole way of doing business, the economic system that has driven three decades of incredible growth, has reached its limits.” But the sudden emergence of an America that can take care of its energy needs while China remains starved for energy (here and here) is also part of the changed equation. According to a leaked assessment by the German intelligence service, these new energy dynamics is altering the U.S.-China balance of power to Beijing’s detriment. And it’s noteworthy that Arvind Subramanian, who just two years ago colorfully opined that China’s unstoppable rise would eventually oust the United States from its long-established strategic position in the western Pacific, has subsequently revised his view.
I’ve focused on the profound economic reverberations of the shale revolution in earlier posts (here, here, here and here). A recent study by IHS Global Insight amplifies these points. It finds that the revolution will trigger more than $5 trillion in capital expenditures by the energy industry between 2012 and 2035. It will also generate significant employment effects, accounting for more than 1.7 million jobs in 2012 and almost 3 million by the end of this decade.
The consequences beyond the energy sector are likewise significant. Because of the new infrastructure needed to haul burgeoning oil supplies to refining facilities and export hubs, the railroad sector is experiencing a building boom that is, as the Wall Street Journal describes it, “unlike anything since the industry’s Gilded Age heyday in the 19th century.” 2013 stands to be the rail industry’s third year in a row of record capital spending, with an estimated $14 billion in new investment. Record spending is also occurring in building additional pipeline capacity (here and here). And as the U.S. gears up to become a major energy supplier, Japanese and French companies have invested $7 billion in a natural gas export project in Louisiana.
After years of industrial outsourcing, the sudden abundance of low-cost energy has made the United States a much more competitive place for energy-intensive manufacturing like petro-chemicals, fertilizer, steel and aluminum. In 2012, wholesale electricity prices fell 47 percent in Texas, 27 percent in New York State and 15 percent in California. Because of the cost advantages accruing from cheaper energy, chemical manufacturers have announced plans to build multibillion-dollar chemical plants in several states and a new $750 million steel plant is opening in Louisiana. Anshu Jain, Deutsche Bank’s co-chief executive, observes that due to the manufacturing edge afforded by lower energy costs the U.S. economy “looks very strong for the next 20 years.”
A new Manhattan Institute study foresees an overall annual bounce of some $600 billion in the U.S. trade balance as a result of dramatically lower oil imports and record energy exports, combined with increased exports in energy-intensive products. Looking more broadly, Charles R. Morris, an investment banker who predicted the financial crisis, contends that the United States is entering into a period of sustained economic growth rivaling that of the 1950s and 1960s, in large part due to the revival of energy-intensive manufacturing. Others (here and here) foresee an energy-driven economic boom that will lead to the revival of the American heartland.
And it’s not hard to find evidence of this latter proposition. North Dakota, home of the Bakken shale formation, is in the midst of a remarkable economic boom. According to a new Bureau of Economic Analysis report, the state posted a 13.4 percent growth rate in 2012, the third consecutive year that is it has led the nation. Oil output has doubled in Texas since 2005, creating a new era of prosperity in Houston and the Midland-Odessa area. Overall, the oil industry in the state generates about $80 billion in economic activity a year. The prospects of former “Rust Belt” towns in Pennsylvania and Ohio are being revived due to their location near the gas-rich Marcellus shale formation (here, here and here). And with the current worries about government finances, it’s worth noting that the IHS report cited above estimates that the shale revolution will generate more than $2.5 trillion in federal, state and local tax revenue between 2012 and 2035.
America owes much to George Mitchell for changing its economic portents. In a post late last year, I urged Mr. Obama to honor him with the Presidential Medal of Freedom, the nation’s highest civilian award. When the White House announces the recipients for this year’s accolades, Mitchell deserves the top spot.
*Not be confused with George J. Mitchell, the former U.S. Senate majority leader and U.S. emissary to peace negotiations on Northern Ireland and the Israel-Palestinian conflict.
**A study released Monday by the Federal Reserve Bank of Dallas finds that the 2007-09 financial crisis cost the United States between $6-$14 trillion in lost economic output, a figure that the report’s authors admit is “conservative” and may very well “drastically understate the true cost of the crisis.”