The impact of the boom in new domestic oil and natural gas production is spreading throughout the American economy.
Industry observers say thousands of jobs are being created by the energy production boom. The explosion of drilling in our neighbor North Dakota as well as other areas in our country is spreading through the general economy – despite opposition from the environmental lobby over the technique known as hydraulic fracturing that has made the boom possible.
Companies are expanding payroll and investing in high-tech equipment to just to meet a steady increase in orders between U.S. manufacturers. This activity is the direct result of the low price and availability of natural gas as well as the impacts on electric rates.
U.S. companies that used to be at a price disadvantage are now positioned to win contracts they could not compete for in a very long time. Some analysts believe the energy cost savings for businesses, factories and consumers will last for decades.
“This is not going to be a one- or two-year thing,” says Ross Eisenberg, head of energy and resources policy at the National Association of Manufacturers. “We’re going to see lower natural gas prices for a long, long way into the future.”
The domestic energy industry has been through several cycles of booms and busts. After peaking in the early 1970s, U.S. oil and gas production began a rapid decline as thousands of depleted wells ceased production. The U.S. quickly became dependent on foreign supplies of oil.
About ten years ago advanced oilfield production technologies known as hydraulic fracturing, or “fracking,” and horizontal drilling began to increase domestic oil and gas production. Many of the now active fields brought into production had been left undeveloped because the remaining “tight” oil and gas deposits were too expensive or technically difficult to produce.
The economics of supply have also played a key role in the boom. A tripling in the market price of a barrel of crude over the past decade supports widespread use of expensive extraction methods that didn’t make sense when oil prices were lower.
Barring unforeseen limits on production, this “unconventional” oil and gas production is now the norm and is projected to grow rapidly over the next twenty years. The industry is expected to make more than $5 trillion in new capital investment that will support more than 3.5 million jobs by 2035, according to the financial analysis firm IHS Global Insight.
That economic impact of this spending already is spreading, especially to companies that rely heavily on natural gas as a raw material or energy source. Steel makers, for example, benefit from both the lower cost of manufacturing and from strong demand for steel pipe used for oil and gas drilling. Others are building near major gas distribution centers like Louisiana, where steel giant Nucor is investing $750 million to open a new plant later this year.
Chemical, plastics and fertilizer makers, who rely on natural gas both as a raw material and an energy source, have also been expanding production. Last year, Dow Chemical announced a $4 billion investment in facilities, part of some $15 billion in expansion plans announced by Gulf Coast chemical companies. In December, economists with UBS bank noted some $65 billion in announced construction of new plants related to cheaper natural gas.
As work on these projects gets under way, the dividends from the energy boom will flow even further – to construction companies, engineering firms, materials and equipment suppliers and lenders who help finance these projects.
That, in turn, will help increase state and federal revenues. The added revenue – from income taxes on new jobs created, corporate taxes on added oil and gas profits and state and federal royalty payments – could top $2.5 trillion through 2035, according to IHS Global Insight.
Though retail prices for gasoline have remained high – primarily because U.S. production still is a relatively small part of the global supply which drives oil prices – American consumers are getting a break on the lower cost of natural gas and electricity. IHS estimates that the energy “dividend” amounts to about $1,000 a year per household and will double by 2035.
Increased domestic oil and natural gas production will also re-balance long-running international trade deficits that have weakened the dollar. As the U.S. moves from a net importer to a net exporter of energy over the next decade, as projected by most experts, oil will no longer be a source of trade deficits and become an important contributor to a positive trade balance.
America’s growing energy independence also has also been fueled by gains in efficiency. Our vehicles are getting more miles from every gallon of fuel, and advanced heating and cooling units combined with green building techniques and materials have cut energy bills for commercial and residential buildings by 10 percent since 2005. Heartland knows something about energy efficiency – our LEED Platinum HQ has cut our energy use by nearly 50 percent.
To be sure, there are forces that could delay – or even stop – the ongoing energy boom. A recent drop in natural gas prices has already slowed production of some projects and the environmental lobby is fighting to prohibit “fracking”.
Lower oil prices could have the same impact on our economy, but it is not certain that added U.S. supplies will be enough to lower global oil prices, especially if OPEC producers like Saudi Arabia reduce production to support current prices.
Some experts are more optimistic on the prospects for a second energy windfall as increased U.S. supplies of oil put pressure on global prices. Citibank analyst Edward Morse believes that by the end of this decade, added U.S. output will push global crude prices back down to a range of $70 to $90 a barrel – a savings of as much as 30 percent. That kind of price reduction would further spread the economic dividend from lower natural gas prices already flowing through the economy.
A 30 percent reduction in oil prices is equal to about 1.3 percent of gross domestic product. In an economy growing at 2 percent a year, the impact of that dividend would be substantial.
Finally, transportation bottlenecks have already slowed the distribution of new energy supplies and could further slow future expansion. Expanding the existing pipeline network, which was planned and constructed decades ago, long before new drilling techniques altered the U.S. energy map, is already facing environmental lobby opposition.
The most visible controversy – construction of the proposed $7 billion Keystone pipeline – could be the opening round of intense battles over the expansion of the pipeline network required to get affordable and reliable new supplies of oil and natural gas from producers to consumers.
Our energy future and national economic health is not tied to unending use of fossil fuels. It is, however, tied to a balanced transition from carbon based fuels that will ensure reliable and affordable energy to consumers. The current energy boom can be the foundation of that balanced transition.