Friday, May 31, 2013

The US fossil-fuel industry is driving a long-term economic boom

The New Prometheus

The domestic energy industry is booming—and driving a U.S. economic revival

WSJ.COM 5/31/13: When the 'shale gale'—the surge in the production of natural gas trapped in very dense shale rock—first came into public view in 2008, the focus was primarily on the energy and environmental implications. But the past couple of years have brought recognition of shale gas's economic consequences, beginning with major job creation in a time of stubbornly high unemployment. President Barack Obama has repeatedly cited the jobs impact of shale, including in his State of the Union address last year and even in one of his debates with Mitt Romney. At the same time, abundant low-cost energy is stimulating a revival of manufacturing in the U.S. as well as increased American economic competitiveness—as angst-ridden European CEOs will tell you. And the change has come quickly. Shale gas, only 2% of total U.S. natural gas production a decade ago, is now nearly 40%.


By Charles R. Morris
PublicAffairs, 179 pages, $12.99
Ted Wood/Aurora Photos/Corbis
Firestarter A piece of shale alight.

The economic portent of America's unconventional oil-and-gas revolution is at the heart of Charles Morris's "Comeback: America's New Economic Boom." Mr. Morris is the author of a number of books on the U.S. economy and economic history. His most recent, the commendable "The Dawn of Innovation," described the explosive growth that resulted from America's first industrial revolution during the early decades of the 19th century. But it was in 1990, at another time of economic gloom, that Mr. Morris published "The Coming Global Boom," correctly predicting an era of strong economic growth.

Now he is back with a similar argument, namely that "the United States is on the threshold of a long-term economic boom, one that could rival the 1950s-'60s era of industrial dominance." The country, as he sees it, is at a turning point that most people, mired in chronic pessimism, are missing. The source of the boom this time, Mr. Morris says, will be "rising American productivity" and industrial "restructuring" that "has made the United States one of the most desirable manufacturing sites in the world, especially in states like Virginia, Tennessee, Georgia, the Carolinas, and Alabama."

The "manufacturing renaissance" in the U.S. is also fueled by what is happening elsewhere. With industrial wages increasing 15% to 20% per year, China is losing what had been the indubitable edge that transformed it into the workshop of the world. There is also the logistical advantage of manufacturing close to North American markets, especially when transportation costs are added in. All this is giving the U.S. renewed impetus as a manufacturing platform for global exports: Japanese auto makers now build cars in the U.S. for export to Europe; the German engineering conglomerate Siemens does the same for gas turbines sold to Saudi Arabia.

But—and this is central to Mr. Morris's argument—what really turbo-charges this American advantage is what he calls "the new X-factor, the American energy advantage," the arrival of low-cost shale gas. Here is the big new chance for American industry. As Mr. Morris puts it, shale gas can be the central pillar of America's coming economic rebound. "Unless something goes horribly wrong," he says, "energy is a game changer." The U.S. and Canada have this ace up their sleeves while, at least at this point, no one else does.

There are other reasons to be optimistic, according to Mr. Morris: The comeback he foresees is bolstered not only by the new availability of inexpensive, abundant energy and the resurgence of manufacturing but also by an uptick in public infrastructure investment and the continuing growth of the health-care sector.

His main focus, however, is the positive economic impact of shale gas. He spends some time on the employment effects. He cites research findings from IHS, a research firm of which I am vice chairman, showing that 1.7 million jobs are currently supported by this unconventional revolution in oil and gas. (That doesn't include the additional jobs resulting from the expansion of manufacturing.) Most of these shale jobs have been created since 2008 and the beginning of the recession. The economic impact of shale, including especially the job numbers, helps explain why public policy has been supportive of shale gas and why state governors focused on economic development are among shale's biggest backers. And the job creation will continue to explode: Mr. Morris argues that this unconventional revolution could support more than four million jobs by the end of this decade.

Mr. Morris adroitly explains the workings of what he calls—no doubt to the alarm of some—"the splendid technology that makes [shale] possible." That is hydraulic fracturing, better known by the now-famous shorthand "fracking." This is the process of injecting water and sand mixed with a small amount of chemicals, under high pressure, to create fractures in rock deep underground that allow gas to flow into the drill hole.

But the author's discussion becomes confusing when he takes on the environmental questions around shale gas. Despite the oft-expressed concerns in the fracking debate about the amount of water used in the process, Mr. Morris points out, such drilling even in gas-rich Texas uses only 1% of the total water consumed in the state. He rightly underlines the importance of properly dealing with the waste water produced from drilling a well, one of the central tasks of proper environmental stewardship. All good, but then he also declares that the most dire portrayal of the environmental risks by anti-fracking critics is "mostly right." Yet then he switches course yet again and concludes that the environmental issues can be managed—although he never really demonstrates that they aren't being managed well in the first place.

Mr. Morris is particularly exercised about "fugitive emissions" of methane from gas production. This is a subject of major debate because methane is 25 times more potent a greenhouse gas than carbon dioxide. Mr. Morris wholeheartedly embraces the view that this is a very big problem, dismissing analysis that indicates that the risks have been greatly overstated. But in April, the Environmental Protection Agency—which had previously expressed much concern on this subject—significantly lowered its estimate of methane emissions owing to an improved understanding of well operations. Further reductions in the estimates will likely result from the prevalence of "green completions" in new wells, which trap methane instead of allowing it to be flared or vented into the atmosphere.


Mr. Morris's worry about exports reflects his fear that there may not be enough natural gas to go around. But today's natural-gas market is constrained by demand, not supply. Just a few weeks ago, the Potential Gas Committee, a nonprofit affiliated with the Colorado School of Mines and the authoritative source on the nation's gas resources, raised its projection for technically recoverable natural gas supplies in the U.S. by 26%.

When he gets to his third pillar—stepped-up spending on roads, bridges, railways and the like—Mr. Morris makes a compelling case that the U.S. is significantly under-investing in the infrastructure needed to support economic growth. "We now spend," he writes, "half as much on public infrastructure relative to the size of the economy as we did fifty years ago." He points, for example, to the deterioration of the inland waterways that tie the Midwest and its industries together and on which the manufacturing revival will depend. It was too late for his book, but the collapse a week ago of I-5 over the Skagit River in Washington state underscores his warnings about the risks from aging infrastructure, including tens of thousands of "structurally deficient" and "functionally obsolete" bridges around the country. Remedying the widespread infrastructure deficiency through public spending, Mr. Morris predicts, will add fuel to a once-again roaring industrial engine. "Infrastructure financed by borrowing has a long and honorable history in the United States," he writes.


Overall, "Comeback" captures the major changes set in motion by the unconventional oil and gas revolution. The result, Mr. Morris says, will be higher economic growth and a quickly disappearing federal budget deficit. "Trade and budget deficits will shrink in real terms and cease to dominate the political discourse," he writes. This will in turn change politics: "A vigorously growing economy going into the 2016 election should lock in a liberal ascendancy for a considerable period." To help speed the decline of the deficit, Mr. Morris, who describes himself as an "old-fashioned liberal," calls for moving tax rates up "a good notch," though without addressing the setback that such a "good notch" might mean for the comeback.


The contribution of "Comeback" is to cogently lay out the bright economic consequences of the unconventional oil and gas revolution and the revival of manufacturing. Shale gas and tight oil are proving, in ways not expected even a couple of years ago, the fuels of America's comeback. Without them, the economy, instead of gearing up for a comeback, would have been held back even more than it has these past few years.
—Mr. Yergin, vice chairman of IHS, a research and consulting firm, is the author of "The Quest: Energy, Security, and the Remaking of the Modern World." In 2011, he served on the U.S. secretary of energy's subcommittee on the environmental aspects of shale-gas production.

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