America's Unconventional Revolution, Energy Security and Innovation
By Daniel Yergin
The United States is in the midst of an unconventional revolution in oil and gas that, it becomes increasingly apparent, goes beyond energy itself. Today, the industry supports 1.7 million jobs—a considerable accomplishment given the relative newness of some of its technology. That number could rise to 3 million by 2020. In 2012, this revolution added $62 billion to federal and state government revenues, a number that could rise to about $113 billion by 2020. It is helping to stimulate a manufacturing renaissance in the US, improving the competitive position of the US in the global economy, and beginning to affect global geopolitics. This revolution has also engendered two debates—about the environmental impact of shale gas development and about the role of US energy exports.
The unconventional revolution has unfolded pretty fast. It is striking to think back to the turmoil of 2008, when it was widely assumed that a permanent era of energy shortage was at hand.
In the Beginning
This development is a story of entrepreneurship and innovation. Although hydraulic fracturing dates back to the late 1940s, it took from the early 1980s to the end of the 1990s, in the face of much skepticism and disappointment, to establish that natural gas could be economically extracted from shale rock using that technology. By 2003, it was successfully yoked with another technology, horizontal drilling, to provide proof of concept.
Still, the dominant conviction for the next few years was that the US was going to become increasingly short of natural gas and would become a large importer of liquefied natural gas (LNG). Only in 2008 was it observed that US natural gas production was going up, instead of down. Many more companies entered into shale gas development, and the pace of effort intensified. Since then, output has grown rapidly, indeed well beyond the capacity of the current market to absorb it. It was not until the autumn of 2009 that the shale revolution became apparent to the policy community. And it was only around 2010 that producers began to shift from focusing on gas production to producing oil and liquids-rich natural gas using the same techniques.
The Economic Impact
While various states had begun to home in on the economic development aspects of shale gas and tight oil, it was only in about 2011 that its significance for the national economy started to come into focus. So far, this unconventional revolution is supporting 1.7 million jobs—direct and indirect. It is notable that, owing to the long supply chains, the job impacts are being felt across the United States, including in states with no shale gas or tight oil activity. For instance, the state of New York, which presently bans shale gas development, nevertheless has benefitted with 44,000 jobs. Illinois, debating how to go forward, already registers 39,000 jobs.
The total revenues flowing to governments from unconventional gas and oil amounted to $62 billion last year. Companies are now committing or planning investments that in total appear to go into the hundreds of billions of dollars. A large number of chemical companies, for instance, have announced plans to build or expand facilities in North America—with capital expenditures totaling close to $100 billion. Will all be built? Time will tell. But what is striking is that, half a decade ago, these companies would have scoffed if they had been told that they would be investing back into the US. The investments are coming both from US-based companies, which are “on-shoring” in response to lower energy costs, and from foreign companies. Many other kinds of manufacturing firms are also investing and expanding based upon this growing business.
The Environmental Impact
How to assess the environmental aspects? The most notable impact is in terms of CO₂ emissions. US carbon dioxide emissions from energy consumption are down 13% since 2007. The economic downturn is part of the story. But the most significant part is the result of natural gas supplanting coal in electric generation at a rapid rate.
Hydraulic fracturing has only been recently applied at this scale and with this degree of intensity in regions that are more densely populated and that are not accustomed to oil and gas development. Understandably, the environmental impacts need to be carefully assessed and monitored, and the public needs to be confident about these impacts.
In March 2011, President Obama spoke about how “recent innovations have given us the opportunity to tap” large reserves of natural gas—“perhaps a century’s worth of reserves.” But he added that the public needs to be assured that it is being produced safely. As a consequence, a subcommittee to the Secretary of Energy’s Advisory Board was established to examine the environmental questions. Its work identified three major environmental issues—water, local air pollution, and community impact. Each, the subcommittee concluded, needs to be managed with great attention and that can be achieved through best practices in operations and regulation, continuing technological innovation, and community engagement. We see continuing effort going into these endeavors—with, for instance, recycling of water and new approaches to wastewater treatment.
One observation that came out of that study is what seems to be a mismatch between perceptions of regulation and actual regulation. Drilling is a highly-regulated activity, but it is mostly regulated at the state level. We identified the need to continue to support, with what amounts to very small funding, the activities of STRONGER—State Review of Oil and Natural Gas Environmental Regulations—a collaborative benchmarking and standard-setting organization that evaluates and promotes continuing improvement of regulatory activities among the states.
Gas and Oil Imports, Exports
US imports and exports of energy have been a major issue for almost 70 years. Until the end of the last decade, it seemed that the main question about oil imports was how fast they would increase as a share of total consumption; and, for gas, how large the exports would become. This unconventional revolution has turned around the direction of imports. US net imports of oil have declined from a peak of 60% in 2005 to about 40% today. That is the consequence of surging tight oil production, and reduced demand, owing to both greater efficiency and the weak economy. Moreover, the flow of imports has changed. Canada now supplies about 27% of total US imports.
Net imports of crude will continue to decline. But the US will continue to remain a net importer for some time. Our import levels are still higher than they were at the time of the first oil crisis, in the 1970s. However, we will see the Western Hemisphere, and North America in particular, moving towards greater self sufficiency. At the same time, the very large, technically-advanced refining complex on the Gulf Coast—along with the shifting domestic product demand—will put the US in the position to continue to expand exports of refined products.
While markets and economics will eventually determine the realistic scale of US exports, one also has to take into account wider considerations in assessing policy regarding future exports. For decades, the US has made the free flow of energy supplies one of the cornerstones of foreign policy. It is a principle we have urged on many other nations. How can the US, on one hand, say to a close ally like Japan, suffering energy shortages from Fukushima, ‘please reduce your oil imports from Iran,’ and on the other, turn around and say that new natural gas exports to Japan are prohibited?
The Geopolitical Impact
One immediate impact has already been cited. Tighter sanctions on Iran have succeeded in taking half of Iran’s oil exports out of the market, even as global demand for oil continues to expand. The increase in Saudi output was part of the formula. But also of great importance has been the growth in US supply—at a rate higher than generally anticipated.
Certainly expanded domestic supply will add to resilience to shocks and add to the security cushion. Moreover, prudent expansion of US energy exports will add an additional dimension to US influence in the world. However, there will remain only one global oil market, and a major disruption anywhere would affect the entire market. The question as to how the unconventional revolution will affect US involvement in the Middle East is moving to the fore. Current net US imports from the Persian Gulf are equivalent to 8% of total consumption, as it is. Even if that number goes down, the nature of US interests in the region go well beyond direct oil imports to the importance of the region for the global economy and global security.
Altogether, the unconventional oil and gas revolution has already had major impact in multiple dimensions. Its significance will continue to grow as this revolution continues to unfold.
Daniel Yergin is Vice Chairman of IHS and founder of IHS Cambridge Energy Research Associates. He is author of “The Quest: Energy, Security, and the Remaking of the Modern World” and received the Pulitzer Prize for his book “The Prize.” He serves on the US Secretary of Energy Advisory Board. This article is excerpted from Yergin’s testimony before the Subcommittee on Energy and Power of the House Energy and Commerce Committee on February 5, 2013. SME thanks the US House of Representatives for making these remarks available.