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Daniel Yergin: The Real Stimulus: Low-Cost Natural Gas

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The Wall Street Journal Opinion dated October 22, 2012 by Daniel Yergin

The impact of the U.S. energy revolution is only beginning. It is already providing a foundation for a domestic renaissance in manufacturing.

An unconventional oil and gas revolution is under way in the United States, but its full ramifications are only beginning to be understood. The basic facts are clear enough. Half a decade ago, it was assumed that the U.S. would become a large importer of liquefied natural gas; now the domestic natural gas market is oversupplied, thanks to the ability to produce shale gas through hydraulic fracturing and horizontal drilling technologies.

Shale gas alone is now 10% of the overall U.S. energy supply. And similar technologies to recover so-called tight oil trapped in rock formations are largely responsible for boosting U.S. oil production by 25% since 2008—the highest growth in oil output of any country in the world over that time period.

So far more than 1.7 million jobs are the result, according to a report titled "America's New Energy Future," released Tuesday by my research firm, IHS. These jobs include people working on rigs in Pennsylvania or North Dakota, manufacturing equipment in Ohio or Illinois, and providing information- technology services in California or legal services to royalty owners nationwide. The number of jobs could rise to three million by 2020. The energy revolution will add an estimated $62 billion to federal and state revenues this year.

But the energy revolution is having other effects that get less attention. The balance of payments is one. The increase in domestic oil production over the past five years will reduce our oil-import bill this year by about $75 billion. The growth of shale gas will save the U.S. from spending $100 billion a year on imported LNG, which was the likely prospect five years ago.

There is also a geopolitical dimension. The increase in U.S. oil production since 2008 is equivalent to almost 80% of what was Iran's export level before the imposition of sanctions on the Tehran regime. Without the additional oil coming from the surge in U.S. oil output, the Iranian oil sanctions could not have worked as well as they have.

Domestically, growing natural gas supplies provide a foundation for a manufacturing renaissance, at least for industries for which energy is an important feedstock or where energy costs are significant. Chemical companies have been leaving the U.S. for years in the search for lower-cost countries in which to operate. Now they are planning to invest billions of dollars in new factories in this country because of inexpensive and relatively stable natural gas prices. The price of natural gas, which averaged $2.66 per thousand cubic feet in the first nine months of this year, is less than half of what it was five years ago.

This holds out a tantalizing prospect that the U.S. could regain market share among the world's manufacturing exporters. That prospect preoccupies companies around the world, from Europe to China. When I was in China recently I heard much talk about how China's historical advantage in cheap labor (which is becoming less cheap) could in the years ahead be offset by cheap energy in the U.S.

We're also beginning to hear a debate about the U.S. role as an exporter of liquefied natural gas. LNG exports to countries with which the U.S. has free-trade agreements require no government approval. Approvals are needed, however, for exports to a long list of countries with which we have no such agreements, including Japan, Britain, India and many others. But an investment in building export facilities for this trade won't make sense unless producers have the flexibility to ship to diverse destinations as markets change.

Opposition to LNG exports comes from a variety of sources, ranging from those concerned about the impact on domestic prices to those who simply do not like shale gas. In December, the Department of Energy is expected to issue its report on the possible effect of gas exports on the overall economy. The report will provide some guidance as to what to expect in terms of LNG exports.

Yet there are two points to be made now. First, the scale of American LNG exports would be naturally limited by the competition from other existing suppliers around the world, as well as by new supplies coming from recent large gas discoveries offshore of East Africa and Israel.

Second is a larger context. The U.S. is successfully pushing Japan to reduce its oil imports from Iran, one of its largest traditional suppliers. At the same time, Japan, still reeling from the Fukushima disaster, is buying expensive LNG from both spot markets and traditional suppliers in the Middle East and Asia to replace nuclear power for generating electricity. How can America, having asked Japan to reduce Iranian oil imports, turn around and prohibit the export of surplus natural gas to this key ally?

The economic, political and even geopolitical benefits of the energy revolution to the U.S. were not foreseen at the time of the 2008 presidential election—but they are now of clear importance. And the growing production of shale gas has led to environmental  controversy.

Last year a committee was set up to report to the Secretary of Energy on environmental questions. (I was a member of that committee.) The committee identified three major environmental considerations—wastewater, local air pollution and community impacts—that need to be carefully managed with the rapid development of this activity.

The committee recommended a series of pragmatic solutions, centered around "best practices" for both operations and regulation, innovation (e.g., reduced water use) and engagement with community stakeholders. These initiatives will help to provide a safe foundation for the further development of the industry.

The rapid growth of oil and natural gas production represents a major opportunity for the U.S. Without these energy resources, the disappointing economic picture would look worse, and so would the jobs numbers. Instead, the energy revolution is helping revitalize the economy and make the U.S. more competitive in the global marketplace.

— Mr. Yergin, vice chairman of IHS, a global market information and analytics company, is author of "The Quest: Energy, Security and the Remaking of the Modern World" (Penguin, new edition, 2012).

 

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