The Shale Gas Revolution
July 9, 2012
Rapidly increasing natural gas production in the United States due to new extraction technologies has been widely described as an energy revolution—and it is. But like all revolutions, only some of its consequences are immediately apparent while others may emerge unexpectedly as time passes. Beyond its predictable and attractive economic benefits, America’s possible emergence as a significant natural gas exporter, and the development of “unconventional” gas resources elsewhere, could have important political effects both within the United States and internationally.
A recent study by the global information and analysis firm IHS finds that shale gas supported 600,000 jobs in the United States in 2010, a number projected to reach 870,000 in 2015 and 1.6 million in 2035, when shale gas would account for 60% of US natural gas production. The study predicts that this will add $118 billion per year to the US economy by 2015 and $231 billion per year by 2035—and that the cumulative tax revenues for federal, state, and local governments could approach $1 trillion during this period. During a period of otherwise slow growth, shale gas production appears set to be a major asset for the United States.
In looking ahead, two broad questions seem central to assessing the actual future economic and political impacts of shale gas production: (1) will the United States be able to increase production as projected, and (2) will other nations with significant shale gas reserves exploit them successfully? These two questions are too complex to address fully here, but do require careful consideration of a variety of factors. Inside the United States, these include domestic politics and regulations (which seem generally favorable) and environmental impacts (which have been limited and appear manageable), among others. In other nations, the most important factors will vary; China may have less difficulty with political or environmental concerns but could face problems acquiring enough water, which is essential for the hydraulic fracturing process that frees shale gas for extraction, while European governments and companies could encounter significant domestic political opposition to massive and resource-intensive projects.
A narrower but still significant question is whether the United States may become a natural gas exporter. The US Energy Information Administration currently projects that the United States will have the capability to export LNG as early as 2016 and to become a net exporter of natural gas soon after 2020, with a surplus reaching 1.36 trillion cubic feet (tcf), or about 38 billion cubic meters (bcm), by 2035. (The surplus could be as high as 7 tcf, or nearly 200 bcm, in the most optimistic scenario.) To provide a sense of perspective, the EIA estimates Japan’s gas consumption at approximately 4 tcf in 2035. Notwithstanding its projections, the EIA’s respected Annual Energy Outlook states in its 2012 edition that LNG exports “depend on a number of factors that are difficult to anticipate and thus are highly uncertain.”
Assuming that the United States produces sufficient gas to export, US law currently requires government permission for exports. Obtaining this authorization is considered a routine process for exports to US free trade agreement partners, who receive national treatment. However, there is a low-level debate over gas exports in the US Congress, where some members would like to limit exports in the hope that this will depress domestic gas prices. Others argue that freer exports would produce only limited price increases while helping to ensure that increased production is sustainable. Few appear to have considered whether export restrictions intended to suppress domestic energy prices could leave Washington open to charges of providing inappropriate subsidies under World Trade Organization rules.
The final hurdle for US gas exports may be price. Though US domestic natural gas prices could remain low by historical standards, exports of liquefied natural gas would require massive infrastructure investment. Whether US prices would be internationally competitive would clearly depend heavily upon market conditions two decades from now. Of course, even if the United States does not export any gas, its declining imports will continue to ease pressure on international LNG markets. LNG from the Middle East originally intended for the United States has already made its way to Europe, where it has aided some of the continent’s major consumers in reducing the price of imports from Russia.
The wider implications of sharply expanding shale gas production are still primarily speculative. Nevertheless, for those concerned about climate change, one analyst has estimated that the shift from coal to natural gas in US electricity generation has already reduced greenhouse gas emissions by twice the amount cut through regulatory limits in Europe. This reinforces the view, put forward by many, that technology and markets will be more valuable than regulations and limits in combating climate change.
At the level of international politics, the United States as a natural gas exporter could be less dependent on the Middle East, particularly if projects like the Keystone XL pipeline simultaneously allow for greater oil imports from Canada. Still, even if America imported no Middle East energy, its domestic prices would be shaped by international markets and Washington would likely remain quite concerned with the region’s security and stability. One unknown is how the United States would conduct itself as a net exporter of energy—and whether and how US leaders might try to employ energy politically.
The success of shale gas outside the United States could ultimately prove equally if not more significant to global affairs. If China, Ukraine, and Poland developed extensive production, for example, Russia could lose some of its important current and future export markets. China, in particular, may have shale gas reserves even greater than those in the United States; if Beijing were close to self-sufficient in natural gas—or even looked like it would be—Moscow might have to give greater attention to Japan and South Korea as possible customers for its eastern-oriented exports. If Australia were developing its shale gas reserves at the same time, Asian gas markets could evolve rapidly.
Even if it did not make a dent in Germany’s gas relationship with Russia, substantial production in Ukraine and Poland could significantly undercut Russia’s energy leverage over many central and southern European nations, which are highly dependent on Gazprom but require relatively low volumes of gas. With more LNG available from the Middle East for the large western European economies, Russia could see its principal claim to international influence—and a large source of economic growth and taxes—slowly erode.
From this perspective, America’s shale gas—and its possible emergence as the world’s largest gas producer within the next decade or less—may also be important in countering the narrative of a United States in decline. “America’s decline” has been an inevitable topic at a time of domestic economic troubles and poor foreign policy decisions, but those who foresee it make two critical mistakes: they assume that Washington’s current problems are long-term rather than short-term and they confuse others’ growing economies and influence with America’s fall. The shale gas revolution is a clear example of why and how the United States has become an international leader—and how it can remain one.