The country sits at the cusp of an energy revolution, but without a sound plan and leadership to carry it out, all this nation really has is a lot of gas.
For the first time since the Nixon administration, America is poised to have an energy surplus. With the supply of natural gas spiking due to increased hydrofracking in the Marcellus Shale — a concentrated tract of carbon-rich marine fossils and sedimentary rock stretching from New York State to Georgia — Americans have seen savings in excess of $100 billion since 2010 as a direct result of the increase in natural gas production, with an approximate $1 billion per day being added to the economy due to the boom.
This offers the potential to change the global geopolitical and economic landscape for the perceivable future, as the United States and Canada emerge as the holders of the largest energy reserves on the planet and as crude oil supply and prices drop.
However, serious concerns about the environmental impact of hydrofracking, inefficiencies in the national electrical grids and the increased demand for residential and business use of natural gas threatens to endanger America’s energy renaissance.
This increase in the natural gas supply has affected the economy in multiple ways. First, coupled with the expanded role of renewable energy in the national energy portfolio, natural gas — which burns with fewer carbon emissions than coal — is quickly becoming the primary fuel for energy generation. This boost in cleaner, cheaper electricity is lowering the cost of production in the U.S., causing a rebound in the domestic manufacturing sector. The lower cost of petroleum has held consumer goods prices steady, mitigating inflation.
According to an early release overview of the United States Energy Information Administration’s 2014 Annual Energy Outlook, America’s projected oil production for 2016 is expected to increase to 9.5 million barrels per day –the highest level of production since the 1970 oil boom. While oil production is expected to reach its peak by 2020, natural gas production has no foreseeable ceiling. The EIA projects that the U.S. — which is already the world’s leader in natural gas production — will see a 56-percent increase in natural gas extraction in the next two decades. This year, the Marcellus Shale offered 13 billion cubic feet in natural gas per day.
As a result, the EIA is projecting that domestic consumption of foreign energy will drop to just four percent by 2040, from the high of 30 percent in 2005. The EIA is also projecting that gasoline in the U.S. will drop to an average of $3.03 per gallon (in 2012 dollars) by 2017, but will skyrocket to $3.90 over the next two decades. Renewable energy is expected to see only a four-point increase in market share by 2040. This is despite the fact that renewable energy will nearly double in production over the same period — by comparison, natural gas production is expected to increase by 56 percent from 2012 to 2040.
Petroleum and inflation
According to the EIA report, the increase of domestic oil production, which will take the nation’s dependence on foreign oil from the current 37 percent of the nation’s oil consumption to 25 percent in 2016, is expected to drop the cost per barrel of crude oil by $20 from 2012 to 2017.
While production in North Dakota and Texas has spiked and as oil production in the Midwest and the Gulf States has developed, the U.S.’ limited role in global oil commodity trading — due to a ban on oil exporting without a Department of Energy license in response to the Organization of Petroleum Exporting Countries oil embargoes of the 1970s — means that the domestic oil boom will have a limited effect on gas prices.
Energy Secretary Ernest Moniz has called for an end of the restrictive energy policy.
“Those restrictions on exports were born, as was the Department of Energy and the Strategic Petroleum Reserve, on oil disruptions,” Moniz said in remarks to reporters at the Platts Global Energy Outlook forum in New York last week. “There are lots of issues in the energy space that deserve some new analysis and examination in the context of what is now an energy world that is no longer like the 1970s.”
The oil companies are currently lobbying for the allowance of exporting, arguing that the U.S. can significantly increase export earnings, as the higher-quality oil being currently extracted in America is being refined with increasing difficulties by U.S.-based refineries designed to refine a lower-quality oil.
The oil companies are saying that exporting will increase the global supply of oil, lowering the prices for gas. However, many — including key members of Congress — feel that increasing the global oil supply will destabilize situations in the Middle East, particularly, among Arab League nations, who are showing irritation with the U.S. over the warming relationship with Iran.
This could lead to a shrinking of global oil production, spiking prices. Increasingly, American oil companies are exporting to Canada — in which export licenses are easier to obtain, so that gasoline and diesel refined in Canada can be exported freely into the global market.
“The growing chorus from the oil industry to change longstanding U.S. law to permit the export of American crude oil is a disturbing trend,” said Sen. Edward Markey. “This oil should be kept here in America, to benefit our consumers and to reduce our dependence on imports from the Middle East.”
The correlation between America’s oil production and the global price of gasoline has been an issue of contention politically in recent years. The argument that increased American oil production and refinement will decrease the “price at the pump” and promote the creation of new jobs has been seen at an expanding rate to justify the expansion of the Keystone XL pipeline and as a major political platform plank for Republican candidates.
In reality, gasoline prices are not set in the U.S. As the U.S. imports a third of its oil, prices are set on the global commodity market — and as the U.S. does not export oil in significant quantities — expanded domestic production can only marginally affect petroleum prices — typically, within a margin of 10 to 20 percent.
Currently, gasoline is currently selling at 1.6 percent less and natural gas at 1.8 percent prices last month, leading to no significant gains in the Consumer Price Index. Prices rose 0.1 percent last month and 1.3 percent over the year. With the Federal reserve targeting inflation at 2 percent, these low numbers may suggest — to economists — a pacing of the dollar out-of-step with the expected growth of the economy. But for the typical American, it represents relief from high trade imbalances and skyrocketing consumer goods costs from previous years.
The Commerce Department has announced a $1.8 billion reduction in the nation’s account deficit — the difference in what the nation exports in goods, services and investment to what it imports. This is the largest drop in the deficit per GDP since the first quarter of 1998. Clothing prices fell for the third straight month in November, while food prices ticked up 0.1 percent.
“Core inflation is still running too low,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York, to Bloomberg. “We probably have further weakness to see as retailers adjust prices to reduce the stockpiles that we know boosted growth.”
Manufacturing on the rise
One of the biggest benefactors of this new surplus of energy is the manufacturing sector, which has became an endangered species due to domestic manufacturing being taken to China, Taiwan and Mexico, where labor and regulatory costs are lower.
But as China and many of the other outsourcing-friendly nations emerge as established economies, worker protections and guaranteed wages have negated most of the benefits many of the larger consumer goods manufacturers gained from producing their goods abroad.
The low cost of energy in the U.S. has made domestic manufacturing one of the more cost-effective options for mass production currently, which is reflected in the Institute for Supply Management’s report indicating that manufacturing activity expanded to its fastest pace in 30 months in November. Among the largest growth areas are petroleum, chemicals, plastics and rubber.
Analysts at IHS estimated that 3.2 percent of all manufacturing jobs last year were directly due to the U.S. oil and natural gas boom, with the number expected to reach 4.2 percent by 2025. However, manufacturing is just 11 percent of the national gross domestic product, meaning that a full resurgence of the manufacturing sector will not rebound the economy without recovery from the service sector.
“We wouldn’t dismiss the energy boom as a key economic development,” said Paul Dales, senior U.S. economist for Capital Economics, to the contrary. “Over the long run, it will support GDP growth and transform certain parts of the economy. But it’s not going to make a major difference over the next year or so.”
The Senate-released Manufacturing Jobs for the Future report has indicated that the American manufacturing sector has added a half of a million jobs to the economy since 2010 and that exports of American-made goods have risen 38 percent in the same timespan.
Manufacturing is currently the nation’s most profitable industrial sector, returning $1.48 per every $1 spent.
However, the fact that 83 percent of all manufacturers are reporting moderate to severe shortages of high-skilled workers and that more than 600,000 high-skilled manufacturing jobs are unfilled reflects the growing crisis that — despite the fact that the U.S. is at its best position economically to grow the manufacturing base — the American workforce is not yet up to the task.
The horns of a dilemma
All of this is forcing a particularly painful choice for the Obama administration. On one hand, the oil and gas boom has allowed for significant reductions in coal-burning, created major gains in the reduction of carbon-emissions and has added fuel to a struggling American economy.
But this is being done at undeniable cost to the environment, as large amounts of volatile chemicals are being used to fractured the rockbed of numerous communities. Besides threats to the local water supply, the fracturing has been linked to an increased number of earthquakes and tremors. While the effect of long-term hydrofracking is not known, the socioeconomic impact of the procedure is enough to cause pause.
“Spending a few hours in towns in the active Marcellus Shale drilling region of Pennsylvania provides even a casual observer with sights and sounds of undeniable community change,” wrote Jill Kriesky for Physician for Social Responsibility. “A visitor who spends a little more time chatting with social service providers, town leaders, and long-time residents will hear about additional stressors that lie below the surface.
“Homelessness is on the rise among those who have long struggled near the economic margins and are now forced from inexpensive housing by landlords seeking higher rents from gas workers. Tensions between the ‘mailbox millionaires’ for whom leasing of mineral rights have created new economic opportunities and power, residents without the interest in or resources to lease, and short-term workers behaving recklessly in their time off are often palpable and unwelcome.”
On the other hand, walking away from the “energy boom” will not only infuriate industry leaders, but it will force a return to coal-burning for energy production and an increase in coal-mining. This would undoubtedly undermine any progress the Environmental Protection Agency has made in controlling greenhouse gas emissions from coal-burning plants. This will also force the U.S. to seek foreign oil and natural gas in a global market that is — due to increased consumption from the European Union, Russia and China — increasingly more competitive.
However, growing concerns that the national electric grid — which has previously been sold on a natural gas boom that did not materialized — is ill-equipped and unwilling to adapt to this new boom, and the realization that about 33 percent of the nation’s natural gas production is used for industrial feedstock for chemical plants and another 36 percent is used for residential and commercial heating represent a policy currently not suited to take on a natural gas surplus.
To make the most of this boom, not only must the government assure that the extraction of the oil and natural gas is done in the least intrusive, least harmful manner possible, but that there is a clear, responsible plan of how the fuel will be used once it is out of the ground. As it stands now, this country is at the cusp of an energy revolution. But, without a sound plan and the leadership to carry it out, all this nation really has is a lot of gas.