U.S. Oil and Gas Boom

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David Brady's picture

U.S. Oil and Gas Boom

The United States is in the early stages of a revolution in the oil and gas industry that will have major implications not only for the United States but also for the entire globe. U.S. energy companies are uncovering vast supplies of oil and natural gas that were not previously attainable. This will enable the United States to become a net exporter of energy within the near future, and it will result in lower energy costs which will give the United States a competitive advantage in the world and thus promote U.S. economic growth. But, the newly discovered supplies of oil and gas will reduce the U.S. incentive to eliminate fossil fuel use and make it more difficult to reverse climate change. Moreover, it will have a negative economic effect on many OPEC countries that rely on high oil prices and exports to the United States.

High energy costs have created a strong incentive for countries around the world to develop renewable energy and reduce fossil fuel use. For example, the Danish Energy Agency has set a goal for renewable energy to power 100 percent of Denmark by the year 2050. Environmental concerns are certainly a reason for this, but the high fossil fuel costs play an important factor. In Australia, renewable energy has actually become more cost efficient than energy from fossil fuels. New wind energy is 14 percent cheaper than coal and 18 percent cheaper than natural gas.[i]

Until recently, the United States has faced similar incentives. Many people believed that there was a limited supply of oil and gas within the United States, so the United States would have to import most of its energy from abroad and increase its use of renewable energy. Nevertheless, because of technological innovation of horizontal drilling and hydraulic fracturing, oil and gas companies have been able to extract oil and natural gas from shale rock formations that are abundant throughout the United States. These can be found in the Bakken shale region of North Dakota, Marcellus Shale in Pennsylvania, and Eagle Ford Shale in Texas, among others. Furthermore, regulations already enacted to increase the use of renewable energy and higher fuel efficiency standards will reduce future oil consumption.

Therefore, the worries of running out of oil are over, and the United States is on its way to achieving energy independence. The International Energy Agency (IEA) estimates that by around 2020, the United States will overtake Saudi Arabia and become the largest global oil producer. The IEA predicts that the United States “becomes all but self-sufficient” in terms of energy.[ii] Leading energy economist Philip Verleger argues that this will “bring an economic renaissance to the United States.”

Companies operating in the United States will have access to much lower energy prices than European and Asian countries. This will entice many companies to “reshore,” bringing back manufacturing to the United States. Furthermore, since extracting gas and oil from shale is more labor intensive than conventional drilling, it will create many jobs. As a result of the United States becoming a net exporter of energy instead of a large importer, the U.S. trade deficit will decrease considerably. Moreover, the lower energy prices will increase consumers’ disposable incomes since they will have more money leftover from each paycheck that they will not have to spend on energy. Finally, with this economic growth and reduced trade deficit, the budget deficit should decrease significantly, and the U.S. fiscal outlook will improve.[iii]

This is great news for future U.S. economic growth; however, it is a nightmare for environmentalists. As Verleger explains, “Technology has been employed to solve one problem. The solution opens the doors to new ones.” The most obvious consequence is the effect on the environment. Environmentalists now have a much tougher time advocating their proposals to eliminate fossil fuels. Back in 2008, when oil prices were around $140 per barrel, and the United States was importing much of it from the Middle East, there were strong incentives to promote renewable energy and reduce the burning of fossil fuels. If oil prices drop significantly as expected from domestic oil supplies, however, those incentives will disappear.

In addition to the environmental concerns, the U.S. oil boom will cause problems for OPEC countries that have come to rely on high oil prices to fund their domestic spending plans. Oil producers from Africa, such as Algeria and Nigeria, produce oil that is very similar to shale oil. As a result of the U.S. shale boom, African oil exports to the United States have already decreased dramatically, and that trend will likely become greater. This has caused a split between African and Arab members of OPEC as they try to find a way to deal with these problems.[iv]        

In conclusion, despite these costs, the oil and gas boom is here to stay. The United States is sitting on huge supplies of oil and natural gas, and there is no way that politicians and the energy industry will not take advantage of it. Because of this oil and gas revolution and the economic benefits that should come from it, the burning of fossil fuels will continue. Therefore, the benefits of cheaper energy will come with the costs of increased global warming.

References

[i]Peter Bronski. “Is a High Renewables Future Really Possible? (Part 2).” Rocky Mountain Institute. May 23, 2013. http://blog.rmi.org/blog_05_23_2013_is_a_high_renewables_energy_really_p...

[ii]International Energy Agency. “World Energy Outlook 2012: Executive Summary.” November 2012. http://iea.org/publications/freepublications/publication/English.pdf

[iii]Philip K. Verleger, Jr. “The End of the Oil Crisis.” The International Economy. Winter 2013. http://www.pkverlegerllc.com/assets/documents/TIE_W13_Verleger.pdf

[iv]Benoit Faucon, Sarah Kent, and Hassan Hafidh. “U.S. Oil Boom Divides OPEC.” The Wall Street Journal. May 27, 2013. http://online.wsj.com/article/SB1000142412788732385580457850887118646098...

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